Fed, BoE hike rates by 75 bps; how will higher interest rates impact your mutual funds? Will your equity and debt mutual funds be impacted?The US Federal Reserve and Bank of England raised interest rates by 0.75 percent. The central banks are forced to raise rates to control inflation that has reached multi-decade high. That means the interest rates are likely to stay higher or even climb higher in the coming month.
In India, the Reserve Bank of India has already raised rates four times in the current fiscal year to tame in inflation. The trouble is though interest rate hikes can help contain inflation, it may also hurt growth and spoil the mood in the financial markets. Will your equity and debt mutual funds be impacted?
According to fund managers, the market was expecting a bit of a dovish tone from the Federal reserve, but the central bank did not provide any such indication. The Indian rupee weakened against a strong dollar, which rose to the highest in a week after the Fed announcement. The government bond yield also moved up.
Fund managers believe that even though rate hikes might continue in the USA, they might not be this big. Some fund managers believe that rate tightening will continue for some time across the globe.
“This would largely keep global central banks on a continued tightening path, and we expect the same in the case of India also. We believe RBI will hike repo rate with 6.75% as fulcrum terminal rate. Given the dollar strength and our current account deficit situation, we do not think RBI would lower its guard or pause earlier as that would create further speculative risks on INR. Given that RBI has missed the inflation target zone for three consecutive quarters and law requiring RBI to provide explanation to the government, we think RBI will not keep even tighter vigil and hence tighten policy to levels where it is sure of meeting inflation targets and not pause prematurely on hope. With this view in mind, we see yields hardening by 15-25 bps over the next couple of months. The yield curve is expected to remain flattish in the move,” says Akhil Mittal, Fund Manager, Tata Mutual Fund.
Mittal also says that the yield hardening will lead to possible MTM impact on debt investors in the near term. However, it will also provide better accruals to existing and new investors once the yield moves up.
On the other hand, some fund managers believe that even if RBI follows the Fed, the impact won’t be very big because the Indian markets have already factored in the hikes. Fund managers say that equity markets can stay volatile for a while and investors should be prepared for that.
“RBI is unlikely to react to the US Fed hike in a big way as it was on expected lines and was broadly discounted by markets. RBI has spoken about being data driven and while it will look to contain inflation, it will also support growth in the economy. Markets will continue to be volatile due to global inflation concerns and geopolitical tensions; however, investors should continue to stay invested for the long term,” says Ajaykumar Gupta, Chief Business Officer, Trust Mutual Fund.
Suresh Sadagopan, chief planner, Ladder7 Financial Advisors, say the situation is extremely serious and investors, especially new investors, should proceed with utmost caution. He says individuals should think about financial planning seriously. They should have a contingency fund in place. If they have any goals coming up in the next three years, they should keep money for it. For short term goals, stick to short term debt funds. You can also try to achieve your goals with target maturity plans.
“Investors should understand that the scenario is totally unpredictable. We have no control over it. We may also get affected by a global recession- so even future is uncertain. That is why you should pay attention to your goals and asset allocation at this point,” says Sadagopan. “Your investments will be affected but there is no point trying to change your plans looking short term trends.”
This story originally appeared on: India Times - Author:Tax Cognition