Rising Interest Rate and Debt Funds

The sharp turn

In the last two years, we have deep rate cuts and entire focus was on reviving growth. Pandemic ended with rise of new concerns. Amid weak global signals, rising bond yields, persistent high inflation, uncertainty around the Russia-Ukraine war and rate hikes by the US Fed – market is under pressure. We can see huge outflows from equity market and building pressure in debt market for mark to market losses.

Inflation is the major concern both in India and globally. Major economies inflation has been decades high. The Indian inflation for April was at 7.97% while US was at 8.3% in April (highest since 1981). Hence major central banks have taken the rate hike path. At home, Interest rates have been trending north as the RBI shifted its focus from growth to ensuring inflation remains within the target going forward, by starting the cycle of rising interest rate.

^{Source: Bloomberg, as on 1 June, 2022.}

At the start of the year Inflation rose due to high crude oil prices and is further inching up due to elevation in food prices. This cost push inflation is expected to remain high for some time. Therefore, the action on interest rates may continue to control the same. Coming down to the impact it may have – one of the impacts can be seen in lending rates. But same is not reflected in deposit rates. As banks have enough liquidity (surplus money for disbursement) and not huge demand for loans, they need not increase deposit rates. Increase in lending rates may lead to rise in cost of borrowing for corporates and ultimately may impact economy growth. Government efforts to give fuel excise cuts and LPG subsidy and enhanced food and fertilizer subsidy will reduce government revenues which may lead to increased government borrowing.

What is in this for the investor?

Like equity, debt market also goes through different cycles. The recent rise in domestic and global bond yields has led to a fall in the value of traded bonds and debt fund returns. Most common investment behaviour in equity is strategically investing based on economic cycle and sector exposure to benefit from volatility and generate return. If in the same way debt is approached based on interest rate cycle by investing in the appropriate fund of the debt scheme categories, one can generate better risk adjusted returns.

Based on current scenario below are few of the suitable options investor can go for.

It is a misconception that investors can benefit from debt mutual funds only in a falling interest rate scenario. They can select funds from the various debt fund categories as per their risk profiles and goals to create a diversified portfolio, which could create wealth in different interest rate environments. Equity has taught investor to think long term via Systematic Investment Plan (SIPs). Same learning is applicable for long term investors on their debt investments with a mix of buy and hold and long term debt which gives them a mix of coupon and long debt experience as long as they understand the volatility in debt and therefore have investment horizon to overcome volatility.

An Investor Education and Awareness Initiative by Mirae Asset Mutual Fund.
For information on one-time KYC (Know Your Customer) process, Registered Mutual Funds and procedure to lodge a complaint in case of any grievance Click Here.

Disclaimer:
^{The information contained in this document is compiled from third party and publically available sources and is included for general information purposes only. There can be no assurance and guarantee on the yields. Views expressed in this document cannot be construed to be a decision to invest. The statements contained herein are based on current views and involve known and unknown risks and uncertainties. Whilst Mirae Asset Investment Managers (India) Pvt. Ltd. (the AMC) shall have no responsibility/liability whatsoever for the accuracy or any use or reliance thereof of such information. The AMC, its associate or sponsors or group companies, its Directors or employees accepts no liability for any loss or damage of any kind resulting out of the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein. Any reliance on the accuracy or use of such information shall be done only after consultation to the financial consultant to understand the specific legal, tax or financial implications.}

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.