Categories: Business

How to Use New Mutual Funds That Pay Higher Rates Than Fixed Term

The instant liquidity pool has become very popular through the use of digital wallets and home banking apps. Now there are new ones with better performance, but they are not the same (Illustrative image by Infobae)

Aggressive rate reduction in which the Central Bank played a major role in tandem with the national treasury, made some of retail savers’ favorite investments such as deposits fixed timepaid accounts digital wallets And “fixed term” general funds see their incomes fall. In this context, and in response to clients’ desire for better results, mutual fund managers have developed a new product that aims to exploit the rate differential that exists today between the yield paid by the monetary authority to banks and the yield offered by the Treasury on its Lecapa bills.

New T+0 mutual funds investing in Lecap They are beginning to gain popularity in the Argentine financial market as a profitable alternative for savers looking to maximize their peso returns. Although funds of this type are still few in number, their appeal lies in their combination of high liquidity and returns that are higher than those offered by traditional instruments such as fixed-term funds. However, it is critical to understand how they work and be aware of the risks associated with them, because although they promise high rates, investing in Lecap involves risks related to the solvency of the government and the volatility of the prices of these securities.

The emergence of new T+0 mutual funds is a response to the need to offer attractive alternatives in a low interest rate scenario. Since December last year, the central bank has consistently cut interest rates, which has impacted returns on peso-denominated investment vehicles widely used by Argentines, such as fixed maturities and money market funds from digital wallets. Since rates have fallen sharply from 130% annual nominal in December 2023 to 40% in May 2024, these instruments no longer offer inflation-beating returns.

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Reduction interest rates forced banks to adjust their profitability on fixed terms, setting it at about 30% per annum. This situation has forced investors and companies to look for better alternatives to their excess liquidity. In response, stock exchanges have begun structuring T+0 funds that invest primarily in treasury capitalization bills (Lecaps), instruments offering significantly higher yields, around 50% per annum for the shortest tranches.

money market funds, which have historically been a popular short-term investment option due to their immediate liquidity, have also lost appeal in this new low-rate context. Falling rates and the obligation to save a significant part of the money invested have reduced their profitability below the established time frame. This has caused a migration of funds towards the new FCI T+0, which not only promises higher rates, but also the ability to redeem money on the same day, after the market closes.

“These are not funds that can be used like a traditional T+0, in which we put money for a couple of days (…) This is a fund in which we need to stay for 3 or 4 weeks”

These changes in the investment landscape have prompted small savers and companies to consider the new T+0 funds as a viable alternative to maximize their peso returns. Offering rates ranging from 42% to 55% per annum, these funds not only significantly outperform bank returns, but also provide quick and efficient access to liquidity, meeting the demand for higher returns without compromising the security of your investments.

The new T+0 mutual funds have become an attractive option in the Argentine financial market, especially in the context of low interest rates and the lack of traditional returns in an inflationary environment. These funds allow investors to access their funds with immediate liquidity, meaning they can withdraw their money when the market closes. This makes them an ideal alternative for those who need quick liquidity without sacrificing competitive returns.

Lecaps are debt obligations with a market price very different from fixed term or non-negotiable bonds (Reuters).

These financial instruments invest primarily in letters of capitalization (Lecaps) issued by the National Treasury, which offer higher rates of return than traditional fixed terms. With returns that range from 42% to 55% nominal annual returns, these funds are well above the 30% that most banks currently offer on fixed terms. Additionally, the ability to redeem your money at the end of the trade provides flexibility not found in other short-term investing options.

Diversification into Lecaps and other immediate liquidity instruments allows these funds to maintain a conservative risk profile suitable for investors seeking to maximize their returns without taking on significant risks. The structure of these funds also makes them accessible to small investors, with minimum investments starting at $1,000, democratizing access to higher returns compared to traditional banking products.

Although it is a product that is invested in for the short term and is very liquid, it does have some risks. The main one is that the government does not pay Lekap, which happened during the market crisis of 2019, in the midst of a collapse in the exchange rate after Kirchnerism won the election.

Another risk is the price of Lecap, which could fall in value, causing the share price to decline. This is a very limited risk, but it exists.

In 2019, Mercado Pago linked its mutual fund to Treasury debt. The collapse in the prices of these securities caused the fund to suffer losses during the trading session. Losing a cent. But cents that are very difficult to explain to the mass audience that the Argentine unicorn is aimed at. The digital wallet has since changed the type of fund it invests in.

“These are not funds that can be used like a traditional T+0, in which we put money for a couple of days, even if it has immediate liquidity. In a month, for example, Lecap may not work for a couple of days. This is a fund we need to stay in for 3-4 weeks,” the portfolio manager said.

Below we provide some examples of recently launched T+0 funds that use the higher rate paid by the Treasury.

Productivity Fund II (Balanz)