Call rates, benchmark yield up; what should be your debt mutual fund strategy?

The interbank call money rates hit 21-month high yesterday. The 10-year benchmark yield reached a two-year high on Monday. Most mutual fund investors would have missed these two stories in newspaper. Some might have seen it but didn’t think it was a big deal. But they signal something very important. They are saying interest rates are likely to go up very soon

The interbank call rates are rates banks pay to meet their short-term fund mismatches. The 10-year benchmark rate tells you the movement of rates or yields in the money market. Simply put, the market is anticipating a rate hike and the mood is already reflected in the yield movements. It is only a matter of time before RBI joins the party. The central bank is likely to raise policy rates soon.

Sure, you already know it’s impact on the stock market. The market has been nervous about a likely rate hike for a while. Coupled with the omicron threat, the market has been treading on cautious paths for a while.

As for the debt market, the prognosis remains the same. The interest rates are likely to go up soon. The RBI has been keeping a close eye on the virus threat. It is also keeping an eye on the twin threat of growth and inflation. The money market participants are unanimous that it may start the rate tightening soon.

So, what should you do? Stick to your asset allocation plans, say financial advisors. Don’t be adventurous and make any drastic change to your original plans based on the emerging market situation. Remember this is going to be a phase and tweaking your investments based on such trends could be counterproductive.

Debt mutual fund investors should stick to short term funds as these schemes would marginally fare better in a rising interest rate scenario. If you are investing for a very short period, stick to liquid funds. If you are investing for three years or more, you may choose short duration funds, corporate bond funds, banking & PSU funds. You may also bet on floating rate funds. Note, lack of investment options is a cause for concern for these schemes.

If you want to know more about debt investments, read this in-depth interview.
Lower your return expectations from debt funds, says Pankaj Pathak of Quantum MF


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