The Reserve Bank of India on May 4, 2022 increased the repo interest rate by 40 basis points (bp) to 4.4 per cent. Due to this, the problem of paying more EMI has now arisen for the borrowers. But on the contrary, experts believe that the fixed deposit (FD) rates are going to become more attractive in the coming days. On the other hand, if you invest in mutual funds, then let us know what will be the effect on long term to short term investment.
Pramod Chandrayan, Co-Founder and CPO, Finmap, says that due to the hike in repo rate, small and medium scale businesses, consumers and loan seekers will be largely affected by the RBI rate hike as it will result in higher interest rates on loans. There will be recovery. The overall budget and savings of an average investor will be in a criss-cross as they will have to pay a higher interest rate on a home loan or personal loan.
What is the impact of RBI’s rate hike on mutual fund investments?
high debt companies
Anand Dalmia – Co-Founder and Chief Business Officer – Fisdom said that the rate hike means that taking loans is no longer cheap. Hence, companies with heavy balance sheet debt will experience pressure on profits as higher interest costs will lead to higher debt repayments. In such a situation, valuations of many investors will be affected. Therefore, mutual funds investing in these companies will have an adverse effect.
negative impact on the market
He said that fixed income mutual funds will be negatively affected in the long run. At the same time, as the market increases, its effect will change accordingly. Pramod Chandrayaan said the mutual fund industry would also be in deep water as investors would show less interest in pumping fresh money into mutual funds. In such a situation, there can be a negative effect on the market.
Impact on low-debt companies
On the other hand, very large companies with very little debt are likely to perform well. This means that your large cap mutual funds may outperform in the near future. Amit Gupta, MD, SAG Infotech said that companies with low debt will mostly go through corporate governance issues. In such a situation, one can invest with caution or may face some volatility and loss, but do not panic.
What will happen to debt mutual funds?
Anand Dalmiya said that with the increased volatility in the curve, debt fund investments are recommended towards the short end with average maturity within a range of 2.5 years. Some banking and PSU debt funds offer investments with high credit quality and duration risk-optimized portfolios. In such a situation, one should always invest wisely. You can invest according to the quality of where you are investing. Pramod Chandrayaan said that due to the fall in bond prices in the markets, investors investing in debt funds will suffer a loss in total returns.
avoid any kind of reaction
Existing debt fund investors should avoid any backlash at this point of time, it is suggested that one should continue investing till one’s investment horizon. Amit Gupta said that investors who invest in Target Maturity Fund till maturity need not worry as they get locked in the yield at the time of investment.
How will long term mutual funds benefit?
Pramod Chandrayaan said that the least hassle will be for those who invest in large cap funds as these funds are invested in companies that are cash-rich and can manage without taking loans at high interest rates. . For people investing in long term, these troubles will end soon and will give you a good interest money.
What about short term and mid term?
Anand Dalmiya said that short and medium term debt mutual funds will be relatively less affected, while long term debt mutual funds will be subject to limited exposure to interest rate risk. Short term funds will also suffer when rates rise, but the scope will be smaller. Amit Gupta said that if you are investing for occasional years then this will be right for you.