What Do Fund Managers Say About RBI’s Rate Hike? MoneyMindz

By | 08/06/2018
Reserve Bank of India | Financial Advisory | MoneyMindz

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The Reserve Bank of India hiked Repo rates by 25 basis points ever since 2014. Fund(Mutual Fund) managers insist that investors have to stay with short-term debt funds. Apart from this, Fixed Maturity Plans and debt oriented hybrid funds can be preferred by investors during the current scenario. [Get Free Financial Advice On Funds Visit: www.moneymindz.com]

The RBI didn’t amend its estimate on retail inflation to 4.8% and 4.9% for the first half of the current FY and 4.7% for the second half of the current FY. India hasn’t been the sole emerging market economy to raise its rates. Countries like Indonesia, Turkey, China and Philippines did the same.

According to Mahendra Kumar Jajoo, “The policy was anticipated and three key reasons led to hike in rates. First is turbulence in emerging markets, then rise in oil prices and finally pick-up in the core inflation last month. These were some of the key reasons for a rate hike.” Further, he adds, “Investors have to view short-term products with an average maturity of two-three years if they have an investment(investment planning) horizon of 18-20 months.”

As per Rana Kapoor, “Amidst many moving parts, this will involve a careful balancing of global headwinds from elevated crude prices, geopolitical tensions, domestic policies of Minimum Support Prices, and state pay commissions on growth-inflation dynamics”. He adds that the Reserve Bank of India has balanced the price with a neutral stance that provides it with the option to act as per financial conditions globally and nationally.

Short-term bond funds are investing in debt securities which mature in, say a year to three years. They can invest in a mix of short-term instruments like deposit certificates and so on. Franklin India Low Duration Fund, Baroda Pioneer Short Term Bond Fund and Franklin India Short Term Income Plan and many other similar funds have provided returns in the range of 6.5% to 7.75%, the data from Value Research demonstrated.

If returns on short-term debt funds were around 5.25% over the past year on average returns on longer duration funds like income, and long-term funds have provided moderate returns like 3.2% and 0.44% respectively. Chances are RBI won’t stop at just one rate hike hence it is advised to investors that staying in short-term or money market securities is safer than longer duration funds. On Wednesday, the decade-old benchmark securities (G-sec) closed at 7.92%.

As per market participants, the decade-old yield will not cease to stay in the range of 7.75% to 8% in the next two or three months. The rate of fixed income securities will be driven by interest rates prevalent in the market. The correspondence of interest rates and prices of fixed income securities is such that when interest rates drop, the price of fixed income securities escalates and vice versa.

Few industry players have an idea that fixed maturity plans and hybrid funds are better for current times. According to Dwijendra Srivastava, “Investors can lock-in funds at larger yields not only in Fixed Maturity Plans but also hybrid funds which have equity exposure of 10-15% at present”. Such hybrid funds invest in debt and equity funds. The only thing is that 70% to 80% is invested in debt instruments with the remaining in equity.

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