In a surprise move, the Reserve Bank of India increased the repo interest rate by 40 basis points (bp) to 4.4 per cent on May 4, 2022. So, what does this mean for your investments? Fixed deposit (FD) rates are going to get more attractive in the coming days.
“Small and medium scale businesses, consumers and credit seekers will be affected to a large extent” RBI rate hike Because it will result in recovery of higher interest rates on the loans. Small-cap funds will also get an overwhelming response from borrowers. “The overall budget and savings of an average investor will be in a criss-cross as they will be forced to pay higher interest rates on home loans or personal loans,” said Pramod Chandrayan, Co-Founder and CPO, Finmap.
What will be the impact of RBI’s rate hike on mutual fund investments?
Anand Dalmia – Co-Founder and Chief Business Officer – Fisdom said the primary implication of the rate hike is a tighter monetary environment where liquidity is not as fast and borrowing is no longer cheap. In most cases, companies with debt-heavy balance sheets will experience pressure on profits as interest costs rise. This, along with deep discounting of future cash flows, can be expected to impact valuations of many. equity mutual funds Having exposure to such sensitive companies will adversely affect the net asset values.
“On the fixed income mutual fund side, funds with long duration securities and long duration gilt funds will be negatively impacted. Even when the market adjusts for policy reversal, managing the debt portfolio towards the shorter end of the curve and staggered deployment should be an ideal approach in most cases,” he said.
“The mutual fund industry will also be in deep water as investors will be prompted to seal fresh money in mutual funds,” Pramod Chandrayaan said.
What will happen to debt mutual funds?
Anand Dalmiya said, “With increased volatility in the curve, it is recommended to orient debt fund investments towards the short end with average maturity within a range of 2.5 years.”
Select Banking and PSU Debt Funds offer a strong mix of high credit quality and duration risk-optimized portfolio. A portfolio with a staggered deployment approach on the small end provides the investor with the ability to continuously invest and reinvest at higher rates, he said.
For investors seeking a strategic debt allocation over a relatively fixed horizon, targeted maturity funds with a hold-to-maturity approach should offer strong after-tax returns over a period. He said that again, keeping pace with the scheduled monetary policy meeting and rate hike would help in locking in better rates.
Pramod Chandrayaan said that due to the fall in bond prices in the markets, investors investing in debt funds will suffer a loss in total returns.
How will long term mutual funds benefit?
Pramod Chandrayaan said the least hassle would be for those who invest in large cap funds as these funds are invested in companies that are cash-rich and can manage without taking loans at high interest rates.
Anand Dalmiya said that considering long-term mutual funds as long-term debt mutual funds, we expect the higher rates to be effectively eliminated and contribute to the overall yield on the portfolio. However, a gradual pace can be expected as greater clarity emerges through communication as a result of the central bank’s reading of the inflation trajectory and its stance on the subject.
What about short term and mid term?
Anand Dalmiya said short and medium term debt mutual funds will be relatively less affected, while the interest rate risk on long term debt mutual funds is limited.
Should you reduce your investment in equity funds?
Anand Dalmiya said as long as there is no change in one’s investment profile, necessitating a change in one’s strategic asset allocation, there is no need to deviate from the prescribed asset allocation. For a dynamically managed strategic portfolio, we can expect the rate hike regime to fluctuate significantly to give investors the opportunity to buy strong businesses at reasonable prices.