As inflation continues to rise and interest rates remain stagnant, the growth prospects of debt funds do not look good.
The recent inflation numbers may give some respite to individuals. However, they are still above the Reserve Bank of India’s (RBI) target range. The Covid-19-led restrictions had put up supply constraints across the economy which may have led to a rise in inflation. This is what is being expected by most industry-watchers and is, therefore, considered to be transitory in nature.
Will the inflation remain sticky in the months ahead, is something which is still unknown. Meanwhile, debt fund investors are in a state of flux and are looking for answers as far as investing for the short term is concerned.
FE Online in an email interview asked Rachit Chawla, CEO & Founder, Finway FSC, about the concerns investors currently have regarding the inflation. We asked him about the impact of inflation on the investments, specifically on debt funds that one holds, and going forward, what should be the choice of debt funds to park money for short-term needs. Excerpts:
Should investors be concerned because of rising inflation?
Yes, investors who have their money in fixed deposits should be concerned, because they are getting the same returns but inflation is actually depleting the value of their money. What they can do, however, is balance out their investment. We have seen that in case of inflation, generally, the stock market also witnesses a surge. By investing in stocks, they can have the assurance that they’ll have balanced fun despite inflation.
FD rates are already low. With rising inflation, the inflation-adjusted real returns fall further. What is your view and suggestion to fixed-income investors as returns are turning negative?
My suggestion would be to take a balanced approach. If security is what you’re after, sure, you can invest in FDs.
However, make sure you don’t invest more than 30% to 40% of your capital in the FDs as they’re not giving the best returns. Instead, park your remaining investment capital in other high-yield assets. For instance, gold can act as a valuable asset in times to come so that can also be explored.
What is the impact on debt fund investments?
As inflation continues to rise and interest rates remain stagnant, the growth prospects of debt funds do not look good. Historically also, equities have performed well during inflation whereas debt funds have suffered. Now, this does not mean that you should withdraw all your money from debt funds and throw it into equities. Having a balanced portfolio is necessary to make the most out of your investment and different asset classes have different roles to play.
Which debt fund category suits in these times when inflation seems to be rising?
If you do want to beat the interest rate risk amid rising inflation, you should prefer short-term and medium-term debt funds over standalone long-term debt funds as they have a higher interest rate risk associated with them.
How about investing in equities in periods of rising inflation?
Diversify your portfolio and follow a balanced approach to maintain your money’s purchasing power during rising inflation. Investing in equities could be a good idea as they have a good track record of performing well during periods of inflation.