RBI Policy: Best investment strategy for mutual fund investors
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.
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View Details»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.
