- Short‑term bond yields have jumped 25‑75 bps, pushing 3‑12 month securities into the 6.8‑8.1% range.
- Liquid‑plus funds now deliver 6.5‑7% after expenses – up to 200 bps over traditional bank CDs.
- Seasonal liquidity crunch (Jan‑Mar) is fading; rates likely normalize by Apr 2026.
- RBI is expected to stay growth‑friendly, keeping inflation around 3.5‑4% while GDP grows 6‑7%.
- Both bull and bear cases hinge on the trajectory of short‑term yields and macro stability.
You missed the yield surge in December, and now you can capture the upside.
Why Liquid-Plus Funds Are Gaining Momentum Now
Liquid‑plus funds sit between ultra‑short money‑market funds and longer‑duration bond funds, investing in securities with average maturities of three to six months. The recent 25‑75 basis‑point (bps) lift in short‑term yields has translated into a noticeable spread over bank deposits, making these funds a compelling vehicle for investors who need liquidity but also want better returns.
How Rising Short‑Term Bond Yields Redefine the Fixed‑Income Landscape
Three‑month bank CDs climbed from 6.00% in December to 6.88%, while six‑month papers rose from 6.40% to 7.00% and one‑year AA‑rated instruments hit 8.06%. A basis point equals one‑hundredth of a percent, so a 75 bps jump is a material 0.75% increase in yield. This shift is driven by seasonal tight liquidity—government cash balances swell early in the fiscal year and are released only at quarter‑ends, compressing the supply of short‑term safe assets.
Higher yields also reflect a weaker dollar‑rupee pair and a modest outflow from short‑duration schemes as investors chase better risk‑adjusted returns. The net effect: a risk‑reward sweet spot where interest‑rate risk remains low while return potential exceeds that of conventional savings accounts.
Comparative Edge: Liquid‑Plus Funds vs Traditional Bank CDs
Bank deposits for up to six months typically pay 4.5‑5% after tax. After expense ratios, liquid‑plus funds now generate 6.5‑7%, delivering a net premium of 1.5‑2.5 percentage points (150‑250 bps). The premium is not just theoretical; fund managers report that the yield advantage persists even after accounting for fund expenses, which average 0.10‑0.15% for the most efficient schemes.
For an investor with ₹10 lakh to park for six months, the difference translates into roughly ₹75,000‑₹125,000 extra earnings, a sizable boost that compounds if the funds are rolled over.
Sector Ripple: Impact on Money‑Market Mutual Funds and the Broader Credit Market
Liquid‑plus funds’ surge is pressuring traditional money‑market mutual funds, which now face a narrowing spread over their benchmark yields. Funds from major houses such as HDFC, SBI, and ICICI are tweaking their asset allocations, increasing exposure to high‑quality commercial paper and short‑term treasury bills to stay competitive.
At the same time, the short‑duration segment of the corporate bond market is seeing heightened demand, tightening spreads for AAA‑rated issuers. Companies with strong balance sheets can issue short‑term notes at marginally lower costs, potentially feeding back into better pricing for investors.
Historical Lens: When Short‑Term Yields Spiked Before, What Happened?
India experienced a comparable yield lift in late 2018 when RBI’s repo rate fell from 6.5% to 6.0% and the government’s cash‑balance management created a brief scarcity of short‑term securities. Liquid‑plus and ultra‑short funds captured an additional 120‑180 bps over bank CDs for about a year before yields normalized as liquidity improved.
Investors who stayed the course benefited from compounded returns, while those who shifted back to deposits missed out on the tail‑end of the yield curve. The pattern suggests that short‑term spikes, when tied to structural liquidity constraints rather than inflationary pressures, can offer a repeatable earnings window.
Investor Playbook: Bull and Bear Scenarios for a 3‑6‑Month Horizon
Bull Case: Yield compression persists through Q2 2026 due to continued fiscal cash‑balance tightness and a stable RBI stance that keeps policy rates accommodative. In this environment, liquid‑plus funds maintain a 150‑200 bps premium over deposits, delivering total returns of 6.8‑7.2% after expenses. Tactical move: allocate 20‑30% of the short‑term cash buffer to a diversified liquid‑plus fund, rolling over every three months to capture the yield curve’s upward momentum.
Bear Case: Liquidity normalizes faster than expected, perhaps because the government releases a larger cash tranche in March. Yields could retreat 30‑50 bps, narrowing the spread to under 100 bps. Deposits may then become relatively attractive given their safety and zero expense ratio. Tactical move: cap exposure at 10‑15% and keep a parallel cash‑deposit ladder to preserve liquidity while monitoring yield trends.
Regardless of the scenario, the key is to treat liquid‑plus funds as a tactical parking spot rather than a long‑haul allocation. The funds’ low duration limits interest‑rate risk, but they are not immune to credit‑quality shifts, especially if the rupee weakens sharply.
Bottom line: If you have idle cash for three to six months, the current yield environment makes liquid‑plus funds a high‑value, low‑risk alternative to traditional bank deposits. Align the allocation with your liquidity needs, monitor RBI policy cues, and be ready to rebalance as the short‑term yield curve evolves.