RBI has stepped in to rein in spiraling headline inflation and in this direction it has raised the Cash Reserve Ratio (CRR) by 75bps. This will happen in two stages. CRR is the amount of funds that banks have to keep with RBI.
This step by RBI did not come as a surprise to the market as it was already expecting a hike in CRR. Chaitanya Pandey, Fund Manager, ICICI Prudential AMC said, “the rate hike was very much expected by the debt market, participants had already discounted for it in their investment decision.”
But, the important question is what today’s announcement means for debt/income fund investors.
Impact on the Markets
While today’s policy announcement was more or less expected, fund managers are now awaiting cues from the forthcoming union budget. “On debt market side the CRR increase is not going to have much of an impact. Any major reaction can be seen once any fiscal steps are taken. Next month’s budget will give a clear direction for the debt market as Government will announce its borrowing programme for next financial year” said Chaitanya Pandey. Market participants believe that if government borrowing equals or exceeds the FY 09-10 borrowing amount of Rs 4.51 trillion, we may see a major reaction in the market.
Investment in Debt oriented Mutual Funds
It is clear that today’s hike in CRR will not impact bond market much, so debt funds too will not be affected much. Presented below is the investment strategy an investor can follow while investing in different kinds of debt/income based funds:
Liquid Funds: As per Chaitanya an investor with less than 6 months investment horizon may look at investing in liquid funds which may generate steady returns going forward and the returns could also possibly improve.
Income and Gilt Funds: On long term funds, he said that an investor needs to stay put for more than 1 year. But when asked whether it is the right time to enter in he said “long term yields are more dependent on the government borrowing programme to be announced in the budget, so only post budget it will be appropriate to take a call whether to enter in or not”.
With spiraling inflation, possibilities of rate hike in next credit policy and possibilities of fiscal measures by Government and uncertainties over borrowing programme of Government for next financial year may keep the long term rates volatile in short term.
Short Term Debt Funds: On short term funds – funds that invest with an average maturity of one to two years - he said that “in March we may see a gradual increase in short term interest rates, so better to stay away from these funds.” Any increase in interest rates causes a fall in the market prices of debt paper and consequently the NAV of a fund.
Fixed Maturity Plans: With so much uncertainty, an investor may feel safe if he invests in fixed maturity plans and holds it till maturity. FMPs may act as the best bet to tide over short term uncertainties. Typically, FMPs hold their investments till the end of the scheme tenure, thereby cutting interest rate risk in the intervening period.
Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/Investments-in-Mutual-Funds-after-CRR-hike/articleshow/5514017.cms
This step by RBI did not come as a surprise to the market as it was already expecting a hike in CRR. Chaitanya Pandey, Fund Manager, ICICI Prudential AMC said, “the rate hike was very much expected by the debt market, participants had already discounted for it in their investment decision.”
But, the important question is what today’s announcement means for debt/income fund investors.
Impact on the Markets
While today’s policy announcement was more or less expected, fund managers are now awaiting cues from the forthcoming union budget. “On debt market side the CRR increase is not going to have much of an impact. Any major reaction can be seen once any fiscal steps are taken. Next month’s budget will give a clear direction for the debt market as Government will announce its borrowing programme for next financial year” said Chaitanya Pandey. Market participants believe that if government borrowing equals or exceeds the FY 09-10 borrowing amount of Rs 4.51 trillion, we may see a major reaction in the market.
Investment in Debt oriented Mutual Funds
It is clear that today’s hike in CRR will not impact bond market much, so debt funds too will not be affected much. Presented below is the investment strategy an investor can follow while investing in different kinds of debt/income based funds:
Liquid Funds: As per Chaitanya an investor with less than 6 months investment horizon may look at investing in liquid funds which may generate steady returns going forward and the returns could also possibly improve.
Income and Gilt Funds: On long term funds, he said that an investor needs to stay put for more than 1 year. But when asked whether it is the right time to enter in he said “long term yields are more dependent on the government borrowing programme to be announced in the budget, so only post budget it will be appropriate to take a call whether to enter in or not”.
With spiraling inflation, possibilities of rate hike in next credit policy and possibilities of fiscal measures by Government and uncertainties over borrowing programme of Government for next financial year may keep the long term rates volatile in short term.
Short Term Debt Funds: On short term funds – funds that invest with an average maturity of one to two years - he said that “in March we may see a gradual increase in short term interest rates, so better to stay away from these funds.” Any increase in interest rates causes a fall in the market prices of debt paper and consequently the NAV of a fund.
Fixed Maturity Plans: With so much uncertainty, an investor may feel safe if he invests in fixed maturity plans and holds it till maturity. FMPs may act as the best bet to tide over short term uncertainties. Typically, FMPs hold their investments till the end of the scheme tenure, thereby cutting interest rate risk in the intervening period.
Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/Investments-in-Mutual-Funds-after-CRR-hike/articleshow/5514017.cms
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