How rising bank FD rates a challenge for stock market, mutual fund investors?

According to experts, amid hawkish RBI on interest rates, one should look at debt mutual funds as an attractive asset allocation option as RBI is again expected to announce interest rate hike in its next monetary policy committee (MPC) meeting. They advised investors to look at higher accrual schemes, dynamic duration schemes and floating-rate bonds (FRBs) as these assets are expected to outperform other debt instruments during high interest rate regime.

Debt mutual funds in focus

Advising investors to look at debt mutual fund, Chintan Haria, Head Product & Strategy at ICICI Prudential AMC said, “Investors should consider debt mutual funds as debt as an asset class looks very attractive. We expect repo rate hikes in the upcoming meetings, given that inflation continues to persist above RBI’s comfort level, a challenging global economy, high consumer prices etc. Hence, going forward, higher accrual schemes and dynamic duration schemes are recommended. The one category of debt that is likely to outperform remains floating-rate bonds (FRBs). Investors should be mindful that debt too has an important role to play in a portfolio and should not be ignored.”

On mutual fund investors who is looking for an upfront investment option, Chintan Haria of ICICI Prudential AMC said, “An investor considering lump sum investment in equity can opt for balanced advantage or multi asset category.”

Negating the chances of an aggressive bank interest rate hike in India, Amar Ranu, Head – investment products & Advisory at Anand Rathi said, “We have seen repo rate rising to 5.9% in Sep’22 from 4% in Apr’22, a hike of 150 bps which also led to banks raising their deposit rates but so far they have not been raising it aggressively. Since India has managed inflation better relative to global peers, we are almost at peak of terminal interest rates except 35-50 bps additional hike expected in near future.”

Amar Ranu went on to add that banks will not raise the deposit rate aggressively at the moment unless they are crowded out by higher credit growth. So far they have been able to manage with moderate deposit rate hikes. In case the deposit rates rise aggressively, say to 8-9 per cent plus, investors may be tempted to shift some portion of equity money to fixed income to ensure certainty of returns.

“We advise investors to stick to asset allocation and not get swayed by high equity or debt returns. It is prudent to stick to equity and debt allocation basis the risk profile of investors and stay invested in both asset classes depending upon investment horizon and goal targets,” said Amar Ranu of Anand Rathi.

Bank FD vs mutual funds

For those bank customers who switched to mutual funds due to lowering FD returns, Vinit Khandare, CEO and Founder at MyFundBazaar said, “Not prone to inflation risk, and the returns on FDs not being tax-effective, bank FDs may be suitable for low-risk investors however, one needs to measure returns in post-tax terms only. In comparison to bank FDs, mutual funds are more flexible, liquid and tax-efficient. Unlike FDs, mutual funds tend to benefit from higher inflation whereas, in the case of FD, the losses are evident. FDs offer limited choice as interest rates are fixed, depending on the investment period chosen which can be anywhere between 7 days and 10 years.”

Disclaimer: The views and recommendations made above are those of individual analysts or wealth management companies, and not of Mint.