“The Monetary Policy Committee (MPC) met on 3rd, 5th and 6th April 2023 and assessed the macroeconomic situation and its outlook. It decided unanimously to keep the policy repo rate unchanged at 6.50 per cent in this meeting with readiness to act, should the situation so warrant,” the RBI governor said. “Consequently, the standing deposit facility (SDF) rate will remain unchanged at 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent. The MPC also decided by a majority of 5 out of 6 members to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth,.” he added.
However, mutual fund advisors warn investors that they should not be complacent as future rate hikes can’t be ruled out.
Rate hikes are considered negative for debt mutual funds. The prices of bonds fall when the rates go up as bond yields and prices have an inverse relationship. Simply put, debt mutual funds offer paltry returns when rates are going up. When the apex bank holds or cuts rates, they offer higher returns.
Mutual fund advisors say they are unsure whether the RBI will hold the rates for a very long time or whether it will be forced to hike rates again soon. They point out that central banks all over the world are forced to hike rates because of persistent inflation.It is a big question whether the RBI will go against the trend, say advisors.
“The RBI does not have much room to manoeuvre if the Fed is going to hike rates. Only if the Fed opts for a long pause, the RBI will also pause, says Babu Krishnamurthy, Director, Finsherpa Investments. He is recommending short duration schemes to his clients. “We are comfortable with the shorter term funds and sold some long duration funds two months ago. We haven’t changed our stance since then” he adds.
Raj Talati, CFP and partner, ABM Investment, says he doesn’t know the future course of RBI action but he believes that ‘we are near the peak.’ He reminds investors that their allocation should always be dictated by their goals and investment horizon. “If investors have the risk appetite to play the duration game, we are asking them to go for long term funds.”“We are asking investors to stick to short term funds like liquid, ultra short duration, low duration, etc,” says Chokkalingam Palaniappan, Director, Prakala Wealth. “We don’t ask investors to choose long duration schemes because many people can’t deal with the interest rate risk. Though the interest rates are likely to come down in future, I am not asking them to invest in long term funds.”
Talati also says that he has been telling his clients that it is a good time to get into the stock market. “We believe it’s a good time to invest in equity schemes, be it large cap, mid cap, small cap schemes.” He says stocks are available at attractive valuations and investors use this opportunity to create wealth over a long period.
