RBI Policy: What changes for your debt fund investment?

For the debt fund investors, a rate hike is always bad news as it impacts the returns from the debt-fund schemes. In the recent monetary policy review meet, RBI hiked repo rates by 25 basis points and adjusted the reverse repo rate under the LAF to 6 per cent. The marginal standing facility (MSF) rate and the Bank Rate is now 6.50 per cent.

The decision of Monetary Policy Committee (MPC) is constant with a neutral stance on liquidity. MPC expressed the objective of achieving a medium-term target of 4 per cent CPI inflation within a band of +/- 2 per cent, while supporting growth.

Whenever the interest rates go up, long-term debt schemes that invest in debt instruments with higher maturity get badly hit. Due to the inverse relationship between bond prices and yields, the NAV of long-term debt schemes falls whenever the interest rates go up.

The investors in such situation should stick to the short-term debt funds instead of the long-term debt funds. One who has already invested in the long-term debt funds should have the risk appetite and patience to wait for very long term. Credit opportunities funds also form a good choice in the current situation.