RBI keeps repo rate unchanged: Should you invest in debt and equity funds?

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Updated: April 6, 2017 5:46:03 PM

The RBI has kept the repo rate unchanged at 6.25 percent for the third time in the new financial year and thereby it seems it expects banks to take initiatives to ease liquidity. The market was not expecting the RBI to cut policy rates.

If one wants to invest in debt funds, then accrual funds and arbitrage funds will be a better option as these funds earn interest income from coupon offered through bonds.

The RBI has kept the repo rate unchanged at 6.25 percent for the third time in the new financial year and thereby it seems it expects banks to take initiatives to ease liquidity. The market was not expecting the RBI to cut policy rates. The reason being that banks are already flush with surplus funds and are also taking initiatives to increase credit off-take.

Here is how it will impact debt and equity funds and what should you do:

Impact on Equity funds

Since the rates are unchanged, one can get a better valuation of equity in the future. However, the correlation between the equity investments avenues and credit policy rates will not impact your investments. Therefore, if one has done his/her investments in equity funds should remain invested for a longer term. Increasing time horizon of your equity investment will give you better returns in the future.

“Investors should continue with their SIPs in equity funds irrespective of RBI’s credit policy announcements. Given the high valuations of the equity market, they should primarily invest in large cap, flexi-cap, and balanced funds and maintain a measured exposure to mid cap and small cap funds,” says Manish Kothari – Head of Mutual Funds, Paisabazaar.com.

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Impact on Debt funds

After the demonatisation phase when banks are flooded with cash, bank FDs may not provide you higher returns in the future. Moreover, banks have already slashed their home loan interest rates and PPF rates by 0.1 percent. All this indicates that bank FD rates may go down in the near term. However, if one wants to invest in debt funds, then accrual funds and arbitrage funds will be a better option as these funds earn interest income from coupon offered through bonds. This fund mainly provides decent returns when the interest rates decline. Accrual funds are tax efficient because the capital gains are not equal to what you actually withdraw while making the redemption, rather it increases the NAV units where the interest earned in FD is taxable which is clubbed in your income calculating the marginal rate of taxation.

“In the event of status quo on policy rates, investors can continue to invest in ultra-short term bonds for their financial goals maturing within a year. They should invest in the short term accrual and arbitrage funds for goals maturing within 1–3 years. Credit opportunities and accrual funds will continue to gain because of spread compression in bond prices. We are not advising duration funds to our clients due to the possibility of change in the RBI’s credit policy stance, increasing commodity prices and the run-up in bond yields,” says  Kothari.

 

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Keeping inflation in mind, what are good investment options?

To earn inflation-beaten return, one should invest in equity funds by giving an exposure of longer term to one’s invested money in a particular scheme. However, regular review is very necessary for an investor to keep a track whether hisr funds are performing well or not. If not, he can easily switch his money to a better-performing fund.

“Of all asset classes, equity is best equipped to beat inflation rates over the long term. Thus, invest in equity mutual funds to derive inflation-beating post-tax returns. Considering the current market scenario, limit your incremental investments to large cap, balanced and flexi-cap funds and maintain a measured exposure in mid-cap and small-cap funds,” says Kothari.

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