The interest rates have gone up with the Reserve Bank of India (RBI) announcing a hike in the repo rates by 40 basis points. But these also mean an added pain for the debt fund investors who may rush to tweak their portfolios and plan new investments based on the tenure of their investments. This is because when interest rates rise, investors lose from the losing value of the investments made in debt funds. Investors then prefer to invest in funds offering higher interest rates.
If you think that the market would soon bounce back from the current volatile situation, think again. Many financial analysts are of the view that the RBI would soon hike the repo rates by 100 basis points in the current financial year. Currently, the bond market is anticipating a repo rate hike by 200 points and has factored in the interest rates accordingly. The current one-year bonds yield somewhere around 5.10-5.20 per cent while the bonds with maturity periods not less than two years yield in the range of 5.80-5.90 per cent.
Suresh Sadagopan. founder of Ladder7 Financial Advisories, says, “If relevant would suggest Ultra Short Bond Fund as the durations are short here and the effect of repo rates increase will have minimal effect. Such funds are invested for some purpose and some fluctuation in yields does not make this any less suited.”
Many investors are concerned about parking money in short-term money market schemes. However, there are some risk-averse investors who prefer to invest in medium-term and long-term investment options. Raj Khosla, founder and managing director, MyMoneyMantra says, “Bond funds crashed 2-2.5% after the rate hike. More rate hikes are expected this FY, so avoid medium-term and long-term debt funds. Go for low duration funds which will have minimal impact on rate hikes.
Some banks hiked deposit rates by 40-50 basis points. Go for short-term deposits, so that if rates are hiked, you can reinvest at higher rates later.”
Relooking at investment options
Fed interest rate hikes coupled with the continuing war between Russia and Ukraine have aggravated the already volatile market condition. Investors must prefer limiting their investment horizon to not more than two years. The unsecured nature of the market implies that taking a long position in investments at this point might be risky.
There are inherent risks in making reinvestments at present. The investors must decide how to reallocate their investments once the rate hike cycle is complete. Once it is known the extent to which the RBI would tweak the repo rates, investors can decide on both their short-term and long-term investment options.