Good time to park funds in debt, but hang on to those shares

Aug 26 2013, 08:31 IST
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Uncertainty in the market may be spooky but historical data shows that equities have generated high returns after a period of depression. Uncertainty in the market may be spooky but historical data shows that equities have generated high returns after a period of depression.
SummaryHistorical data shows equities have generated high returns after a period of depression.

In just four months, the Indian rupee has fallen by over 20 per cent to breach the 65 mark against the dollar last week, compounding the problems for an economy that was already reeling under the impact of a high current account deficit (CAD), declining gross domestic product (GDP) growth rate, a high interest rate regime and tepid corporate earnings.

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

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