Will the NAV of Liquid Funds drop on the day Repo rate is hiked by RBI?
As they hold only 91 days paper, the fall in the NAV will be recovered sooner than other debt funds.
Does this happen automatically. I thought the NAV will gradually change over time and not instantly
Of course over time, not instantly.
I was mentioning the fact while liquid funds also fall when there is interest rate change, they will bounce back quickly than other funds, because they hold only 91 days paper, and as such the effect is limited, even if there is a small loss, that loss will be stopped as the duration will be over in 3 months.
i have seen it drop on the next day most of the times, but will recover very soon.
The drop may not be attributed to the theoretical definition alone. Demand/supply also could be the reason, meaning investors would redeem the existing funds to find a higher interest bond or coupon
After the rate hike: all major short term debt funds, dynamic bonds, PSU & bank debt funds NAVs crashed Whenever the rate is hiked, older debt fund nav falls & fresh issue nav starts rising isin’s INF109K013N3 INF179K01YM7 INF109K01RT3 INF179KA1JC4 INF174K01JU2 INF200K01594
What would be the quantum of the drop? Say, for a repo rate hike of 25 bps.
I remember studying the theory, let me DM you the calculation methodology. advanced reading
Practically i did not measure because i knew its not hurting that much
I need to redeem in next few days anyways, so want to avoid any nasty surprises.
I believe rate review is on 6th. So should I cash out now?
Curious - you need not reply if not comfortable - why do you wish to redeem the liquid fund. I am sure you must have invested with some intention. This is not the first time, RBI is increasing the rates, they have been doing it in each and every past MPC meeting.
In case your goal for which the liquid fund were initially invested is now complete redeeming it is ok. If not why - just curious.
A related hypothetical question - In case you redeem, today, would your returns from the liquid fund were greater than the savings account of a Bank.