3 Recession Proof Funds To Invest Your Business's Idle Cash-Shootih

3 Recession Proof Funds To Invest Your Business’s Idle Cash

Key Highlights: 

  • A recession is two consecutive quarters of shrinking growth of any economy. With the rising inflation across the globe, the finance gurus are predicting that the global economy is moving towards a recession.
  • Diversifying the portfolio is by far the most reliable strategy for any economic condition like economic slowdown, recession, or inflation. 
  • Business investors can consider 3 mutual funds; overnight funds, liquid funds & arbitrage funds to diversify their portfolio. 

With the rising inflation across the globe, the finance gurus are predicting that the global economy is moving towards a recession. 

Inflation has reached 9.1% in the USA, the highest since 1981. In India, the retail inflation rate is presently at 7.1%. Other parts of the world are also not doing any better, a recent survey results have shown that 63 countries are currently having an inflation rate above 10%. Experts believe that historical trends have suggested a pattern of a recession that follows after a phase of high inflation.  

A recession is two consecutive quarters of shrinking growth of any economy. Equity-market, which is a forward-looking market, is highly prone to market volatility. So as soon as a recession hits the global economy, stock markets take a massive dip. 

In such a scenario, many investors, especially corporate investors become quite hesitant to invest in mutual funds. But equity funds are not the only mutual fund investment options that can generate good returns. 

In this blog, you will explore 3 recession-proof mutual funds that you can consider investing in: 

Investment Strategy For Any Business During Recession: 

While some businesses see recession as a phase of turmoil, others see it as an opportunity to grow. Diversifying the portfolio is by far the most reliable strategy for any economic condition like economic slowdown, recession, or inflation. 

During the recession, when stocks go on a downward spiral, fixed-income or bond funds work as a safety wall for the investors. Fixed-income securities, as the name suggests, have a fixed interest rate that investors enjoy regardless of market volatility. The risk associated with these mutual funds investments is interest rate risk and credit risk, caused by fluctuations in interest rates and defaults by the fund issuer. 

When the stock market is growing, you climb a ladder, but when the stock market is falling, you jump down a building. However, we can neither predict nor time the market. If the market has crashed due to a recession, it will go up again in the future. Therefore, instead of selling all your stocks during a recession and using the money to invest in debt funds, it is a much better practice to diversify your portfolio. 

A strategic diversification of your money in stock and debt mutual funds will allow you to achieve better returns when the market is riding and provide you with a cushion during the stock market crash. 

Now as a business investor, you must be fascinated with the returns of equity mutual funds, but you must keep in mind that they would be the first ones to hit the rock bottom as soon as the recession hits. To strengthen your investment portfolio, here are three recession-proof mutual funds you can add to your portfolio: 

3 Recession-Proof Funds To Park Your Business’s Idle Cash

Overnight Funds

Overnight Mutual Funds-Shootih

Overnight funds are one of the safest investment options as they invest in securities with a residual maturity of 24 hours. They have the shortest lock-in period that helps in evading market risks like the recession. SEBI has recently allowed AMCs to offer instant access facilities in overnight mutual funds that will make investing in them so much easier for investors. 

Now let’s come to why overnight funds are recession-proof. The risk associated with most debt funds is interest rate risk and credit risk. Credit risk has a more prominent impact during the recession so let’s quickly understand what it is.

Credit Risk: 

Most fixed-income securities like corporate bonds, government bonds, treasury bills, money market funds, etc., borrow money from investors at a particular interest rate. So if you have invested in fixed income securities for a 10% interest rate, the bond issuer will pay you the principal and interest after your investment period is over. Credit risk is when the bond issuer fails to pay you back, also known as default. 

When the recession hits, the companies that have issued bonds will find it more and more difficult to pay interest to the lenders thus more defaults will be seen. 

However, in the case of overnight funds, the chances of default by a company are scarce as they mature in 24 hours. It’s less likely that any company will default on an overnight payment because most of them have reserves for at least 3 to 6 months. 

Therefore, it is safe to invest in overnight funds now that we are almost certain about the upcoming recession. 

Read in detail about overnight funds in our blog:  Here is All You Need To Know About Overnight Mutual Funds

Liquid Funds 

Liquid Funds-Shootih

Next in line are liquid funds. Just like overnight funds, liquid funds are also a type of debt funds that invest in fixed-income securities. Liquid funds usually invest in instruments with residual maturity of 91 days. Apart from that, as their name suggests, they are highly liquid and investors can withdraw the investment anytime between these 91 days. The same theory as overnight funds also applies to liquid funds, since the maturity period is short, the bond issuer is less likely to default on payment, making credit risk very low. 

Therefore just like overnight funds, liquid funds are also almost recession-proof. 

If you want to read in detail about liquid funds, read our blog Liquid Mutual Funds – What Are They And How Do They Work?

Arbitrage Funds

Arbitrage Funds-Shootih

Unlike the above two debt-based funds, arbitrage funds are hybrid funds that primarily invest in equity. However, the functioning of arbitrage funds is completely different than any of the other mutual funds. Arbitrage funds deal with two markets; the cash market and the futures market. It buys a share from the cash market and sells it in the futures market (also known as the derivative market) at a profit. 

Arbitrage funds in a nutshell can be explained as: 

  • Simultaneous buying and selling
  • Transaction of the same security in cash & futures market
  • Two different markets are involved in a transaction

Simultaneous transactions from cash and futures markets are what makes arbitrage funds recession-proof. If the value of a share is presently high and can continue to stay high in the future, then the arbitrage funds buy from the futures market and sell it at a higher price in the cash market. Similarly, if a share is not performing well currently but can do better in the future, then arbitrage funds buy the share at a lower price from the cash market and sell it at a higher price in the futures market. 

So in any scenario, the investors are going to gain profit. The buying decision is based on the positions of the bull & bear markets. According to experts, arbitrage funds are the only funds where the market volatility works in the favor of an investor. 

Wrapping Up

With the given economic trends, the recession seems almost inevitable. There’s a famous quote “by failing to prepare, you are preparing to fail.” Preparedness is the only thing that can keep business investors sailing their boats through uncertain market conditions. Adding the above three mutual funds, overnight funds, liquid funds, and arbitrage funds, investors can add an extra layer of safety against volatile market conditions in their portfolios. 

At Shootih, we help business investors explore such low-risk, low-duration mutual funds to invest their idle cash and grow their business wealth. Shootih is the best direct mutual fund platform for businesses that are looking to begin their mutual fund investment journey.  

With Shootih, businesses can prepare themselves for unstable economic conditions in more than one way. We primarily help businesses manage their overall business wealth, track their cash flow, make accurate predictions of income & expenses, identify & invest idle cash in a variety of mutual funds and more! You can explore our platform to learn more & stay prepared for recessions and economic downturns. 

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