How should debt fund investors invest during an RBI rate hike? Here's what Experts have to say

The RBI rate hike continues with a rise in the repo rate to 6.25% by 35 basis points.

debt fund investors invest during an RBI rate hike

Experts believe the RBI rate hike cycle will soon end. It recently increased the repo rate to 6.25% by 35 basis points. Debt fund investors must carefully review their investments amidst the RBI rate hike. 

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Have the rates peaked?

The worrying part for debt fund investors is if you invest in fixed-income products offering a pre-determined rate of return. Central banks have increased interest rates in most key economies. The RBI has increased rates to control inflation by a whopping 190 basis points. Many investors believe the interest rate hike will soon come to an end. However, it might not happen as quickly as some investors think. The macroeconomic situation will decide the pace and quantum of future rate hikes. We expect inflation to be close to or above the upper threshold in the next two quarters. It might still be above the expected target in Q1 next year. Domestic demand might keep economic activity resilient. The recent monetary policy statement suggests that investors must watch the impact of the prevailing measures, and net exports might remain subdued. Investors must monitor macroeconomic factors domestically and globally to be informed about the interest rate movement. We will also gain a lot more information from the Union Budget next year, informing us about the government borrowings and fiscal deficit. 

Will debt funds perform?

Debt funds have been volatile in the last 18 months, and the RBI rate hike has kept gilt funds under pressure. We do not expect the interest rates to come down quickly, which would mean that investors might continue to make profits in short-term mutual funds. However, it might be an opportunity to enter the long-term game.   

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What should investors do?

Trust MF's Bagla believes you must invest half of your capital in funds with lower than two years of maturity because interest rates would hover around seven percent. He believes you must invest 25% in corporate bond funds, short-term funds, PSU debt funds, and banking as they might provide higher returns in the medium timeframe. He suggests investing the remaining 25% in gilt funds as inflation might affect them. GEPL Capital, Head-Debt Markets, Deepak Panjwani, believes investors should continue to invest in short-term funds as they look attractive due to a flat yield curve in the next 15-40 years. Gilt funds and other long-term offerings can be attractive when the interest rate hike reaches its peak. 

It would be good to invest in medium-term products even though short-term products seem attractive. If you consider yourself an aggressive investor, you can opt for dynamic bond funds or gilt funds. Conservative investors can go for Bharat Bond ETF if they want to stay invested for a long duration. You can receive higher returns with indexation benefits. 

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.


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