RBI rate hike may upset investors in debt funds

MUMBAI: The rate hike surprise by the Reserve Bank of India is likely to upset the plans of investors who prefer safe investment avenues like debt mutual fund schemes and fixed deposits. According to investment experts, investors should stick to short-term debt schemes for the time being, as medium- and long-term schemes could prove risky. They also advise investors to look at alternative avenues like company deposits and small savings schemes like post office monthly plan, senior citizen scheme, among others, till a clear picture emerges on the interest rate scenario.Some experts are also suggesting balanced funds and monthly income plans (MIPs) to weather the bad season in debt as the equity component in these schemes would help add a few percentage points to the returns.
According to financial advisors, the early rate hike by the banking regulator is going to be the first in a series of hikes likely this year and it may have a negative impact on debt MFs especially in medium- and long-term schemes. In its effort to rein in inflationary pressure, the RBI hiked the repo rate (at which it lends to banks) to 5% from 4.75%, and reverse repo rate (at which it absorbs funds from the system) to 3.50% from 3.25% on Friday. The rate hike is expected to reflect on both deposit and lending rates, though nobody is sure when banks will start hiking rates.
‘‘The market was expecting a rate hike, but it was surprised because it came early. Everyone is now anticipating another hike in April. If that happens, then it will be the beginning of a series of hikes for sometime,'' says D Sundararajan, investment consultant, Trendy Investments, a wealth management firm. ‘‘In such a scenario, short-term funds are the only option for debt investors. Investing in medium- and long-term schemes could be problematic as it is difficult to predict the interest rate scenario for a long period,'' he adds.
Amar Pandit, a certified financial planner (CFP) at My Financial Planner, says investors should wait for at least a month before locking in their money in long term investment options. ‘‘The banks will hike deposit rates in a month or so. So, it is wise to wait for a while if an investor is planning to make fresh investments. Until that time one can use cash management schemes to park the money,'' he says. He also recommends short-term plans and FMPs to debt investors.
Sundararajan asks investors to look at alternative avenues like balanced schemes and MIPs as the equity component in these schemes will offer a cushion against likely unattractive returns from the debt segment.