With the rupee on a crash course, the Reserve Bank of India (RBI) has had to recalibrate its gradual shift towards a low interest rate regime. As the central bank took steps to drain liquidity out of the system in a bid to provide stability to rupee, both the long term and the short term yields have shot up. Several banks over the last few days have already announced a hike in their base rates.
While the debt investors have taken a mark-to-market hit on their returns because of the sudden rise in yields, both on the short-term and long-term debt investments, the equity market investors too have seen a steady erosion in the value of their investments. Last week, the benchmark index at the Bombay Stock Exchange, the 30-share Sensex, fell below the 18,000 mark to hit an 11-month low.
As banks move to raise their base rates and the housing finance companies hike their prime lending rates, home borrowers are set to face the heat as they will see a surge in the tenure of their home loans.
How do things change for you
There is considerable volatility and uncertainty in the market and that is the biggest factor that investors will have to contend with at this point in time. The sharp changes in yields and stock market movements are not something that should worry a long-term equity or debt investor, as the RBI itself has clarified that the steps are for the short term and as the rupee stabilises, the steps will be rolled back.
While existing equity investors will see a notional decline in the value of their investments, the debt investors have seen a mark-to-market loss on account of the rise in both short and long term yields.
There is one more aspect that will impact your finance. As banks have announced to raise their interest rates, while it will benefit the depositors, borrowers will see an increase in their outflow. A 20-year floating rate loan will see a hike in tenure by 15 months to 255 months as a result of this 25 basis points hike in the rates.
What should you do
With the recent fall in the markets, the Sensex return over the last one year has turned almost flat and the one year returns as on Friday stood at only 3.8 per cent. Investors tracking their investment value may get a feeling that they took wrong investment decision, but the decision is not necessarily a bad one unless you decide to sell your holding or redeem your units.
Historical data shows that equities have generated high returns post a period when the sentiments have been very low on markets and they are down be it after the Harshad Mehta scam in 1992 or the period after the global financial crisis in 2008.
We are currently in one such phase. The currency has depreciated, the GDP growth numbers are on the lower side, interest rates are high and the current account deficit remains high. So even as there is no macro validation for markets to bounce back, experts feel that the numbers cant keep deteriorating at the same pace and the price points make a case for investment.
The market still looks to be range bound as we still dont see low interest rate regime which is structurally good for markets. While we are at the lower end of the range, if there is further correction in the next couple of months, it would be better, said Anup Maheshwari, head of equities and corporate strategy at DSP Blackrock Mutual Fund.
Markets have already fallen significantly and while defensive stocks too have taken a tumble, experts feel that investors can look to enter the market. While systematic investment plans should be continued and can even be increased, investors can even look to park part of their lumpsum investments into mutual funds.
SIPs should not be timed and logically when the markets are down one should look to increase the SIP investment. At some point in the next 3-5 years when the markets are high, investors will see the benefit of such investment, said Maheshwari.
Over the last one month, a series of liquidity tightening measures announced by the RBI to address the decline in rupee against the dollar have resulted in a rise in interest rates and therefore have translated into mark-to-market losses in the returns generated by debt funds over one and three-month period.
The measures are not expected to last for long, as has been communicated by RBI. With that being the case, the medium to long-term debt investors should stay put with their investments and not press the panic button and those looking to make an entry should latch on the opportunity being offered by rise in rates.
The bond yields are very volatile in the current market and therefore investors looking to play on duration strategy (capital gains with fall in interest rates) should be very careful as the uncertainty is very high for the next couple of months on the direction in which the rates move. If the yields go up further then the investor may have to suffer some mark-to-market loss for that period.
The one month return for income fund and short-term income fund stands at (-)0.28 and (-)0.27 per cent. Even as the returns have turned negative for the time being, experts advise remaining invested as the losses are only mark-to-market and those who entered the market with 18-24 month perspective will see their losses recover once the RBI reverses its stance.
In fact, financial planners say that it is a good time to park funds in debt as the rates on offer are high.
Investors who are looking for assured returns can go for fixed maturity plans both for the short and long term, but those who are looking to take some risk and need liquidity, can go with short and long-term income funds depending upon their investment horizon, said Surya Bhatia, a Delhi-based financial planner.
As compared to a month ago, all fixed income products look attractive for investment and since the short term rates are higher than the long term rates, investors can look to invest in short term income funds for good returns over the next one year, said Vishal Dhawan, a certified financial planner based in Mumbai.
Another piece of advice that comes is invest in funds that are holding low risk papers bank certificate of deposits, AAA rated corporate papers, etc.
Home loan and other liabilities
The recent announcement of interest rate hike by the ICICI Bank and HDFC will lead to some pain for the existing floating rate loan customers and they will see a rise in the tenure of their home loans.
For example, if your floating rate loan at 10.5 per cent has a total outstanding of Rs 20 lakh for 18 years (216 months) then as a result of this hike of 25 basis points, your tenure will rise by 11 months to 227 months, keeping the EMI constant.
Individuals can consider liquidating some savings (fixed deposits, etc) and partly prepay their loans so as to reduce the impact of the hike in interest rate. While investors can avoid taking personal loans at these times, they may also look to increase their own contribution while taking an auto loan.
The way forward
A series of liquidity tightening measures announced by the RBI to address the decline in rupee against the dollar have resulted in a rise in interest rates and therefore have translated into mark-to-market losses in the returns generated by debt funds over one and three-month period
Stock market investors, tracking their investment value, may get a feeling that they took wrong investment decision, but the decision is not necessarily a bad one unless you decide to sell your holding or redeem your units
Even as the returns have turned negative for the time being, experts advise remaining invested as the losses are only mark-to-market and those who entered the market with 18-24 month perspective will see their losses recover once the RBI reverses its stance
consider investing in funds that are holding low risk papers bank certificate of deposits, AAA rated corporate papers, etc