RBI Policy: Best investment strategy for mutual fund investors

The Reserve Bank of India (RBI) continued with its stance of pause in the bi-monthly policy review on Friday. The central bank held the Repo Rate (or the rate at which lends money to banks) at 6.5%, in line with the expectations of money market participants. What does the continued pause mean to mutual fund investors?

The Reserve Bank of India has been holding policy rates since February this year. The apex bank had raised policy rates by 2.5% before the pause, starting from May 2022, to contain the inflationary pressure in the economy. Central banks raise interest rates to control inflation by suppressing demand for loans.

According to money market analysts, the policy pause is likely to be a long one as the central bank is extremely vigilant about the inflationary pressure in the economy. Most of these analysts rule out a rate cut before June 2024.

What should mutual fund investors do?

Higher interest rates are bad news for mutual fund investors, especially debt mutual fund investors. It can dampen the positive sentiment in the stock market. It can also adversely impact the debt market. Bond yields and prices move in opposite directions. That means when the interest rates or bond yields go up, the NAV or net asset value of debt funds go down. In other words, your debt mutual funds will offer lower returns.

However, since the RBI policy stance was in the expected line, it doesn’t call for any change in your investment strategy. You may stick to your investment strategy. However, you should proceed with caution, especially if you are getting ready to invest more money in long term debt funds and gilt funds to gain from possible rate cuts.

According to debt mutual fund managers, investors should stick to debt funds that invest in short term bonds and papers as these schemes fare better in a long policy pause. Long term debt funds and gilt funds may face volatility and short-term losses. .

Mutual fund advisors are recommending dynamic bond funds, corporate bond funds, and banking & PSU funds to investors to take care of their goals that are away by three years or more. This is not the time to be adventurous and chase returns, they say. If you are planning to allocate money to long-term debt funds and gilt funds benefit from a fall in interest rates, proceed with caution. It is still not clear when the RBI will start cutting interest rates. So, you may have to wait longer for the double-digit returns.

Investors should always choose funds based on their goals and risk-taking ability. For example, if you have a very short-term goal, you should park the money in a bank deposit or very short -term debt mutual funds like liquid funds, ultra short term funds, etc. Similarly, if you have a slightly longer goal that needs to be met in two or three years, you need to invest in short duration funds, corporate bond funds, banking & PSU funds, etc.


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