Fed rate hike: How will it impact your mutual funds?

The Federal Reserve’s decision to go for a steeper rate hike hasn’t exactly come as a surprise. It seems like there could be more policy rate hikes in the coming months. Since the Fed always sets the tone for the central banks across the globe, several mutual fund investors are asking how it will impact their investments, especially in debt mutual funds.

The Federal Reserve on Wednesday raised its benchmark interest rate by a three-quarters of a point for a second straight time. The US Fed’s rate hike decision follows a jump in inflation to 9.1%. It is widely expected that the RBI would hike rates by 35-50 basis points to maintain an interest rate differential with the USA.

The hefty rate hike, however, didn’t shake the markets much. The benchmark 10-year government securities yield fell by -0.25% today to stand at 7.322%. The yields have been falling since July 20. Fund managers believe that it is because the market had priced in the rate hike by Fed and also RBI’s rate action.

“The US market had already priced in the 75-bps hike and hence the bond yields didn’t move much. Same here in India, the bond yields dropped a little because the market was already expecting a rate hike of this volume. As far as the RBI is concerned, there will be a rate hike, of course not this big. However, the silver lining is that Fed and RBI both have signaled that the pace of rate hikes might moderate. The inflation is still a pressure and it is more in the US than in India,” says Pankaj Pathak, Debt fund manager, Quantum Mutual Fund.

“The rate hike by the US Federal reserve is as expected. The quantum will not be replicated in India since the US and Indian economies are very differently positioned. The Federal Reserve was well behind the curve and is trying to catch up and subdue inflation which threatens to become systemic. In India, the RBI has stayed ahead and as a result, we don’t see policy rates in India increasing as much as in the US. As such, the impact on the Indian equity markets will be limited to the spillover from the US markets with domestic conditions remaining neutral at the moment. Investors need not respond to this as these are transitory conditions and will resolve themselves in time. The Indian economy is poised for a long period of growth and acting on such transitory impulses may deprive investors of the long term benefits that are expected to accrue,” says Rajiv Shastri, Director and CEO at NJ AMC.

“However, the demand -supply issue is a big problem in the longer term bonds. That can keep the longer bond funds like gilt funds and long duration funds under pressure for some time. If you have an appetite for duration, go for dynamic bond funds but if you want to play safe- choose short-duration funds. These schemes can be a part of your core portfolio at all times,” Pankaj Pathak adds.

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