As RBI hikes rates,mutual fund investments needs relook?

For those in long-term debt mutual fund schemes, rate hike is not a good news for debt mutual fund investors. Reserve Bank of India’s (RBI's) decision to hike key policy rates may not be a surprise to most investors, as many mutual fund advisors have been telling for a rate hike.  RBI hiked its repo rates by 25 basis points. As it revealed its monetary policy, the banking regulator said the reverse repo rate under the LAF stands adjusted to 6 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50 per cent.  MPC's decision is right for achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, and for growth.  For this reason mutual fund advisors have been asking investors to stick to short-term debt mutual fund schemes and credit opportunity schemes. Some advisors advised investors to invest in long-term debt schemes and gilt schemes, only if they have a long investment horizon and can tolerate volatility in the short term.  Long-term debt schemes that invest in debt instruments with higher maturity gets badly hit whenever the interest rates go up in the economy. Because of the inverse relationship between yields and prices of bonds, the NAV of these schemes falls whenever the interest rates go up.  Debt mutual fund investors should stick to the short-term debt funds or credit risk funds.   Yes, a rate hike will have a bad effect on those who invested in long-term debt funds. Presently, it is better to have credit risk funds or corporate bond funds. However, investors in credit risk funds must be prepared for risk in them. A corporate bond fund, invests in high-rated and sound companies. If one knows the risk, one may have credit risk funds. Otherwise, have corporate bond fund. Ref. : https://economictimes.indiatimes.com/mf/mf-news/should-you-change-your-mutual-fund-investment-strategy-after-rbi-rate-hike/articleshow/64477671.cms --- Dated: Jun'06,2018.