“Small and medium businesses, consumers and loan seekers will be significantly impacted by the RBI rate hike as it will result in higher interest rates being charged on loans. Small cap funds will also see a disappointing response from loan takers. The overall budgets and savings of an average investor will be crisscrossed as they will be forced to pay a higher interest rate on a home loan or personal loan,” said Pramod Chandrayan, Co-Founder and CPO, FinMapp.
How RBI Rate Rise Will Affect Mutual Fund Investments?
Anand Dalmia – Co-founder and Chief Commercial Officer – Fisdom said the main implication of the rate hike is a tighter monetary environment where liquidity is not as buoyant and borrowing is no longer cheap. In most cases, companies with highly leveraged balance sheets will experience pressure on earnings as interest charges soar. This, combined with further discounting of future cash flows, can be expected to affect valuations for many. Equity mutual funds with exposures to these sensitive companies will experience a negative impact on net asset values.
“On the fixed-income mutual fund side, funds with long-term securities and long-term golden funds will be negatively affected. Even if the market adjusts to the policy reversal, managing the debt portfolio towards the shorter end of the curve and staggering the rollout should be an ideal approach in most cases,” he said. added.
“The mutual fund industry will also be in deep water as investors will be demotivated to seal new money into mutual funds,” said Pramod Chandrayan.
Under such conditions, very large companies with very little debt should do well. This means that your large cap mutual funds are likely to perform better in the near future.
“If you have investments in small-cap companies, be prepared to face some volatility and losses. If your mid-cap plan may also face harsh weather conditions. Unfortunately, most of these companies are also facing corporate governance issues in these trying times, so be very careful,” said Amit Gupta, MD, SAG Infotech.
What will happen to mutual funds?
“With increased volatility across the curve, it is recommended to steer debt fund investments towards the shorter end with an average maturity in the 2.5-year range,” Anand Dalmia said.
Select Banking and PSU Debt Funds offer a strong blend of high credit quality and a portfolio optimized for duration risk. A short-term portfolio with a phased rollout approach provides the investor with the ability to continually invest and reinvest at higher rates, he added.
For investors seeking a strategic debt allocation for a relatively definitive horizon, target maturity funds with a hold-to-maturity approach should offer strong after-tax returns over time. Again, a staggered rollout in sync with scheduled monetary policy meetings and rate hikes will help lock in better rates, he said.
Pramod Chandrayan said losses will be incurred in overall returns by investors invested in debt funds due to falling bond prices in the markets.
Investors in existing debt funds should avoid knee-jerk reactions at this stage. It is suggested to continue to hold the investments until the investment horizon. Investors in target-maturity funds that hold to maturity don’t need to worry because they’re locked in to the return at the time of investment anyway, Gupta said.
How will long-term mutual funds benefit?
Pramod Chandrayan said the least suffering would befall those invested in large-cap funds, as these funds are invested in cash-rich companies that are able to get by without borrowing at higher interest rates.
Anand Dalmia said that assuming long-term mutual fund refers to a long-term debt mutual fund, we expect higher rates to spread effectively and contribute to overall returns for the wallet. However, the percolation can be expected to occur at a gradual pace as more clarity emerges thanks to the central bank’s reading of the path of inflation and consequent communication of its position on the topic.
Amit Gupta suggested staying away from long-term debt funds and gold funds. If you have investments, stay invested throughout the rate cycle. Otherwise, you will have to recognize the losses.
What about the short term and the medium term?
Short- and medium-term debt mutual funds will be relatively less affected than longer-term debt mutual funds given their limited exposure to interest rate risk, Anand Dalmia said.
Short-term funds will also suffer when rates rise, but to a limited extent. They will help you from high rates in the short term as they can also support reports with high rates. These funds invest in reports with maturities between one and three years. If you fund occasional years, this is a good option, said Amit Gupta.
Should you reduce your investments in equity funds?
Anand Dalmia said that unless there is a change in his investment profile warranting a change in his strategic asset allocation, there is no need to deviate from the determined asset allocation. . For dynamically managed tactical portfolios, we can expect the rising rate regime to stimulate enough volatility to provide investors with the opportunity to buy strong companies at reasonable prices.