scorecardresearchRate hikes in store? Should mutual fund investors be worried?

Rate hikes in store? Should mutual fund investors be worried?

Updated: 05 Apr 2023, 08:31 AM IST

Long-term mutual fund investors must not be perturbed by sudden rate hikes considering how their effect is temporary and has no permanent repercussions.

Do continued repo rate hikes affect mutual fund returns?

Do continued repo rate hikes affect mutual fund returns?

The next round of repo rate hikes will be on April 06 this year as the Reserve Bank of India (RBI) is likely to increase the main interest rate by 25 basis points as per the data evaluated from a Reuters poll of economists. 

Amidst the Central Bank’s tightening stance, investors are inclined to know if the forthcoming announcement of the hike would affect mutual fund investments. Should mutual fund investors be worried or is there any fear of mutual fund returns being muted in the long run?

While the Fed’s aggressive stance towards interest rates has caused many of their banks to collapse, the RBI’s hawkish tendency did cause market corrections to some extent though there were many more reasons responsible like the effect of the Hindenburg Research or the continued fear of recession due to the ongoing geopolitical tensions.

A casual tête-à-tête with some personal financial analysts regarding the effect of the repo rate hikes on mutual fund investments revealed

Muthukrishnan, a Chennai-based Certified Financial Planner said, “There is no need to worry for mutual fund investors. In their investing span of a few decades, they would see multiple credit cycles. They would see many bull and bear markets. They also need to go through multiple business and economic cycles, growth and recession, booms, and busts. If an investor wants to worry, he would end up worrying throughout his investment tenure. Trust that India and, hence, corporate India would do well in the long run and stay invested. This would be rewarding and keep you worry-free.”

Viral Bhatt, Founder, Money Mantra shared, “A rate hike is always considered negative for the markets – for both the stock and debt markets –as it raises interest rates, borrowing costs of companies and it may also hurt growth. Debt mutual funds, especially long-term debt schemes, suffer the most as rising interest rates drag returns down. However, with the RBI indicating lower rate hikes, debt mutual funds are likely to offer better returns in the coming months. Once the interest rates start falling, debt schemes, especially, long-term funds are likely to perform better.”

Dev Ashish, a SEBI-Registered Investment Advisor and Founder (Stable Investor) shared, “While a rate hike is not a guarantee in the next RBI meet if it does happen, then it might possibly be the last one in 2023 as inflation is expected to remain in RBI’s tolerance bands. But this might change in case of unexpected global developments. The existing debt fund investors must avoid making any major changes to their portfolios. But having said that, shorter duration debt funds will be relatively less impacted versus those with longer durations given the former’s limited vulnerability to the interest rate risk.”

“As the rate hike cycle plateaus and will eventually head to reversal, it’s possible that some options in medium to long duration might also start looking attractive to increase allocation. But in general, investors are better off not trying to time the rate cycles and remain invested primarily in comparatively shorter-duration funds. But irrespective of the debt fund being chosen, it is important for investors to not take too much credit risk and stick with portfolios offering high credit quality at all times. For equity fund investors investing for their long-term goals, it’s best to stick to their asset allocation strategy and not worry too much about the interest rate cycle. It is always advisable to choose mutual funds based on goals, investment horizons, and risk profile,” added Ashish.

Prathiba Girish, Founder, Finwise Personal Finance Solutions said, “There is nothing to worry about for mutual fund investors. For short-term needs, investments will be parked in overnight funds and the change will not have any margin-to-margin impact. Any impact due to a repo rate hike will be a short-term blip. Long-term investors are there for the long run and expect this. Over time, when the interest cycle turns, there will be good margin-to-margin gains to be made.”

Investors are unsure of how constant repo rate hikes would affect their investments in equities and debt instruments. The effects would be palpable in the near term though investors inclined to allocate their money in line with their long-term financial goals have nothing to worry about.


Too many mutual funds
First Published: 05 Apr 2023, 08:31 AM IST