Rate hikes are never pleasant news for debt mutual fund investors and debt mutual fund traders, notably for those in long-term debt mutual fund schemes. RBI’s decision to raise key policy rates isn’t astounding or any such thing. Quite a number of mutual funds managers and advisers have been discussing rate raises for some time. The Reserve Bank India increased Repo costs by 25 foundation factors. When it disclosed its financial coverage, the banking regulator cited the reverse repo rate beneath the Liquidity Adjustment Facility (LAF) stands adjusted to 6% while the Marginal Standing Facility (MSF) rate and the Bank Rate to 6.50%.
According to the Apex Financial Institution, the resolution of the MPC is in line with the impartial stance of financial coverage in consonance with the goal of attaining the medium-term goal for shopper value index (Consumer Price Index or CPI) 4% inflation inside a band of +/-2%, while supporting progress.
Traders have been asked by many mutual fund advisers to remain in short-term debt mutual fund schemes and credit score alternative schemes for some time now. It is also advised to traders to put money into long-term debt schemes and gilt schemes if they have an extra investment planning horizon and can bear market volatility.
With each increase in rates, long-term debt schemes investing money into debt devices with increased maturity will get affected negatively. This inverse relationship between yields and cost of bonds result in the Net Asset Value (NAV) of these schemes falling each time rates of interest hikes.
Lakshmi Iyer says “We were factoring in a rate hike with a neutral guidance. The market could rally seldom from the current levels. We anticipated it to be either a hawkish pause or a dovish hike” She further adds, “Debt mutual fund investors have to stick to the short-term debt funds or credit risk funds. We have been advising to stay away from long duration funds. The advice remains the same”
Pankaaj Maalde, a Certified Financial Planner says “Undoubtedly, a rate hike will impact whoever is invested in long-term debt funds, negatively. This is certainly not a time to play with duration. Viewing the current scenario, it is better to go with credit risk funds or corporate bond funds”
Maalde wants investors in credit risk funds to be mindful of the added risk in them. To earn more, these schemes invest in lesser quality schemes. A corporate bond fund will invest only in highly rated and sound companies. Maalde says “If you can grasp the risk, go for credit risk funds. Otherwise, your choice has to be corporate bond fund”.
Radhika Rao says that the central bank’s stance was largely along expected lines, reflected in a relatively muted response in the bond and equity markets. She says that there is only a slight shift towards a cautious bias, with headline inflation seen above target in FY19 – at above 5% in 1H FY19 and 4.5-4.6% in 2H and that they remain optimistic on growth, expecting FY19 to head back towards 7%.
The guidance remains data-dependent, with a shift to tighten rates requiring further evidence of a build-up in inflationary pressures. Details on the minimum support prices for the farm produce are awaited, along with the implications on demand conditions from a delayed fiscal consolidation roadmap. Policymakers are also likely to keep an eye on the financial stability risks, arising especially from global policy normalization risks.
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