Mutual Funds: Starting in February 2025, the Reserve Bank of India (RBI) began cutting the repo rate, and in three consecutive meetings – February, April, and June – the interest rates dropped by a total of 100 basis points from 6.5 to 5.5 percent in fewer than six months.
Commercial banks followed suit, and interest rates on fixed deposits (FDs) were subsequently slashed. As a result, investors now have slightly lower incentives to lock their funds in the term deposits.
The alternative? Investors can consider investing in debt mutual funds such as money market funds, corporate bond funds, and liquid funds, say experts.
Swapnil Aggarwal, Director of VSRK Capital, says, “With falling interest rates on savings accounts and fixed deposits, these instruments are becoming less attractive to investors looking for both safety and returns. Under such a scenario, liquid funds and money market funds become feasible alternatives to invest in. These schemes invest in high-quality, short-term securities, which have a fair degree of safety and yet retain high liquidity. As a result, they are ideal for investors looking to park surplus funds without having to lose quick access to them.”
Sridharan Sundaram, a Sebi-registered investment advisor and founder of Wealth Ladder Direct, echoes similar sentiments. “Money market funds and liquid funds are better than investing in a fixed deposit. The chances are that bond prices will go up if the interest rates decline further,” he says.
Debt mutual funds
Liquid mutual funds: These mutual funds comprise debt and money market securities with a maturity of up to 91 days only. There are 39 schemes in this category with total assets under management of ₹5.42 lakh crore, the AMFI data shows.
Money market funds: These funds comprise investment in money market instruments having a maturity of upto one year. There are 25 schemes in this category with total assets under management upto ₹3.37 lakh crore, as shown in the latest AMFI (Association of Mutual Funds in India) data as on 31 July 2025.
“Money market funds also provide slightly higher returns by allocating funds to short-term instruments. Both categories generally deliver better yields compared to savings accounts and even short-term FDs, making them a more efficient option for short-term financial needs. As a result, they are especially useful for maintaining emergency funds or managing temporary cash requirements without compromising on safety,” says Aggarwal.
Corporate bond fund: These mutual funds refer to schemes that comprise a minimum of 80 percent investment in corporate bonds only in AA+ and above-rated corporate bonds. There are 21 schemes in this category with total assets under management of ₹2.05 lakh crore, reveals AMFI data.
“These three financial instruments have different features and uses. So, which one to invest in depends on your investment horizon. If your investment horizon is very short (a few days to three months) and you prioritise liquidity and safety, liquid funds are the preferred choice. If you can hold investments for a slightly longer period (three months to one year) and want somewhat higher returns, money market funds are worth considering,” says Preeti Zende, founder of Apna Dhan Financial Services.
“When an investor wants to invest funds for 2-3 years, it is better to invest in corporate bonds to earn 1-2 percent higher interest than FDs,” signs off Sridharan.
Note: This story is for informational purposes only. Please speak to a SEBI-registered investment advisor before making any investment-related decision.
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