Have Debt Funds Become Unattractive After RBI’s Recent Rate Hike? Know Here…   Jun 15, 2018

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Investors are pulling out money from debt funds and stashing it into bank fixed deposits.

As per the data recently published by the Association of Mutual Funds in India (AMFI), income funds, liquid funds, and gilt funds have collectively seen outflows to the tune of Rs 67,559 crore in May 2018.

It seems mutual fund investors are in a reactionary mode.This is a crucial trend on the backdrop of rising interest rates.

As you might be aware, the Reserve Bank of India (RBI) recently hiked policy rates by 25 basis points (bps), resetting the policy repo rate at 6.25% and reverse repo rate at 6.00%. All the six members (including RBI Governor, Dr Urjit Patel) of the Monetary Policy Committee (MPC) voted in favour of the decision.

What made RBI hike the policy rates?

Mainly, it was the retail inflation (as measured by Consumer Price Index (CPI)) changing its course. CPI inflation for April 2018 rose to 4.58% from 4.28% in the month before, mainly on account of higher fuel prices and, to an extent, food prices.

Core inflation, which excludes food and fuel item, clambered to a four-year high of nearly 6.00%. In addition, international crude oil prices were already rising and there was an upward revision in Minimum Support Price (MSP).

The RBI in its 2nd bi-monthly monetary policy statement for 2018-19 (held on June 6, 2018) while providing the outlook for inflation cited that the actual inflation outcomes since the April policy have evolved broadly on the lines of the projected trajectory. However, there has been an important compositional shift. While the summer momentum in vegetable prices was weaker than the usual pattern, there was an abrupt acceleration in CPI inflation excluding food and fuel.

The headline inflation outlook according to RBI is driven primarily by two countervailing effects:

On one hand, the CPI inflation, excluding food and fuel, rose sharply in April compared to March by 80 bps to reach an ex-HRA level of 5.3%. This suggests a hardening of underlying inflationary pressures. 

Moreover, increase in other global commodity prices and recent global financial market developments, resulted in a firming up of input cost pressures. The resultant pick-up in the momentum of inflation, excluding food, fuel, and House Rent Allowance (HRA), imparted persistence into higher CPI projections for 2018-19.

On the other hand, food inflation remained muted over the past few months and the usual seasonal pickup delayed, softening the projections in the short run, according to RBI. 

Taking these effects into account, the Reserve Bank revised CPI inflation projection to 4.8-4.9% for the first-half of the financial year 2018-19 (H1), and 4.7% in second-half of the financial year 2018-19  (H2), including the HRA impact for central government employees, with risks tilted to the upside.  Excluding the impact of HRA revisions, CPI inflation is now projected at 4.6% in H1 and 4.7% in H2.

[Read: The Good, Bad, And Ugly Of Inflation ]

How has the 10-year benchmark bond yield reacted?

From the start of 2018, the 10-year benchmark G-sec yield has been rising, and has hardened by around 50 bps. On account of concerns such as weak Indian Rupee against the US dollar, blazing oil prices, India's Current Account Deficit might widen, CPI inflation may shoot up, and walking the path of fiscal consolidation could be a challenge.

Rising bond yields is indicative of the escalating cost of capital. The RBI's recent rate hike confirms that lower interest rates and the accommodative monetary policy stance are behind us, as the economy is facing the specific challenges cited above.

Non-food credit growth of banks averaged at 11.7% until May 2018. In contrast, deposit growth remained subdued at 6.7%. As a result, banks and Non-Banking Finance Companies (NBFCs) have increased deposits rates upto 50 bps lately. The rate differential between bank deposits and those offered by NBFCs for the comparable maturities is about 50-100 basis points.

Moreover, the SBI, HDFC Bank, Punjab National Bank (PNB), ICICI Bank, Kotak Mahindra Bank have increased the Marginal Cost Of Funds Based Lending Rates (MCLR) by 10 to 20 basis points across tenures.

When the interest rates rise, debt funds usually yield poor returns owing to an inverse relation between bond prices and interest rates. Under such circumstances, it remains crucial to know what mutual fund investors should do with their debt mutual fund holdings.

[Read: Bank FDs vs. Debt Mutual Funds: Which is better?]

What to expect?

The MPC has reiterated its commitment to achieve the medium-term target for headline inflation of 4.0% on a durable basis. The monetary policy stance has been kept neutral. Basically, this means depending on how inflation moves, the central bank will take a call.

The RBI may consider another rate hike if the inflation rises further and Indian Rupee faces pressure due to outflows of Foreign Portfolio Investments (FPI). Also, given that the Federal Reserve (Fed) is hiking interest rates in the U.S., major central banks across the globe are likely to follow suit.

What investors should do?

During such times, first selecting the category of debt mutual funds becomes crucial.  

PersonalFN is of the view that, investing aggressively at the longer end of the yield curve could prove imprudent now. To put it simply, investing in long-term debt funds (holding longer maturity debt papers) can be perilous (if your risk appetite is low), as benchmark yields are hardening given the risks in consideration.

Ideally, you'll be better-off if you deploy your hard-earned money in short-term debt funds; but ensure you're giving due importance to your investment time horizon, asset allocation, and portfolio diversification. Consider investing in short-term debt funds for an investment horizon of upto two years.

If you have an investment horizon of 3 to 6 months, ultra-short term funds (also known as liquid plus funds) would be the most suitable.

And, if you have an extreme short-term time horizon (of less than 3 months), you would be better-off investing in liquid funds.

[Read: How To Select Best Liquid Mutual Funds For 2018]

Don't forget that investing in debt funds is not risk-free. Therefore, consider the 5-facets while investing in debt funds.

A few highly rated corporate deposits and bonds may also yield better returns than bank FDs. But make sure you study the company's financials before investing, as the risk of default can't be ignored. This will save you from any financial shocks.

Sensible and astute investment strategy serves the path to wealth creation and is always good for your long-term financial wellbeing.

Even 1% Difference Can Make A Huge Difference To Your Investments


Mutual funds offer two plans – regular plan and direct plan.

And as the name suggests, direct plans get you to invest in mutual funds directly without the middle-man (adviser/distributor).

The transaction can be done online or by physically visiting the registrar's or the asset management company's office.

Regular Plan on the other hand is the conventional way. Through this mode, you push your request to transact vide the mutual fund distributor / agent / relationship manager.

To read more please click here.

Why Robo Advisers Need To Put Your Interest First


Man versus Machine

What do you prefer?

Your answer might depend on the nature of work and anticipated action.

To chop a plank into 100 identical pieces, you might use machines.

But to share your worries, you would prefer to chat with a friend rather than a chatbot, right?

With developments in Artificial Intelligence taking over several industries, including banking, many of us are worried about the “so-called” encroachment of machines in human life.

Humans are perceived to be better than machines where cognitive response is expected.

But to drive in quick results as required and with needed precision, technology has proved to be an enabler. And when both human intervention and technology co-exists, it can do wonders.

Many engineering marvels seen across the world are an outcome of humans and machines working together. In the world of financial engineering and investing, too, today machines (backed by human intellect) are playing the role of an investment adviser.

Yes, you guessed it right; we are talking about robo-investing or robo-advisory platforms.

To read more please click here.

GST On Exit Loads Of Mutual Fund Schemes—Is It A Regressive Step?


The Narendra Modi government implemented the Goods and Services Tax (GST) on July 01, 2017. It was considered as one of the most revolutionary indirect tax reforms in the history of independent India.

One year on, it continues to receive a mixed response. Some reports, including one published by the World Bank, highlight the complexities involved in the operation of the GST.

Many experts are now of the opinion that the rates must be lowered and the law must be simplified further. This is because the cost of compliance is creating working capital problems for the companies.

To read more please click here.

Everything You Need To Know About KVP


Kisan Vikas Patra (or KVP) is a small saving scheme originally introduced in 1988 by the Government of India. Later it was discontinued in 2011, again re-introduced in 2014 with some changes vide the union budget.

Among risk-averse investors, this small saving scheme is quite popular.

KVP comes in the form of certificates (similar to bank fixed deposit receipt) that can be purchased from India Post or via designated banks.

To read more please click here.

Should You Invest In Mirae Asset Healthcare Fund?


Mirae Asset Healthcare Fund (MAHF) is an open-ended thematic fund which will predominantly invest in equity and equity related instruments of the companies belonging to healthcare sector.

Being a thematic fund around 80% - 100% of its net asset allocation will be inclined towards the healthcare sector. Hence, the portfolio construction will be focussed.

Thematic Funds invest in stocks from one particular common theme. They are growth-oriented equity schemes that aim at capital appreciation by investing in a set of say 3-4 sectors that are closely related to one particular theme.

To read more please click here.

Why HDFC Mutual Fund Killed HDFC Prudence and HDFC Balanced Fund


The much looked upon Donald Trump and Kim Jong Un summit in Singapore is over.

Making headlines, it deserved the much needed attention of the media houses across the globe, especially considering the different traits both these leaders hold.

While Donald Trump is the president of the Giant – United States; Kim Jong Un is known for his dictatorship of the much tiny nation – North Korea.

However, President Trump did fly halfway around the globe to meet Kim Jong Un, and even agreed to terms that favour North Korea.

To read more please click here.


ICICI Prudential Top 100 Fund Reclassified As ICICI Pru Large & Mid Cap Fund

ICICI Prudential Mutual Fund has renamed and re-categorized ICICI Prudential Top 100 Fund. The new scheme is categorised as a Large & Mid Cap Fund and will adopt a new name ICICI Prudential Large & Mid Cap Fund. As the new scheme name suggests, the erstwhile large cap fund will now invest in a mix of large cap and mid cap stocks.

Effective from May 28, 2018, as per its new mandate, the two-decade old fund will begin a gradual shift from large-cap stocks to mid-cap stocks. As per the new mandate, ICICI Prudential Large & Mid Cap Fund will need to invest a minimum of 35% each in largecap and midcap stocks respectively. Needless to say, the maximum limit is capped at 65% for each.

The renamed scheme also has the flexibility to invest upto 30% of its portfolio in stocks that do not belong to the above market caps. Apart from equity, the fund can invest up to a maximum of 30% in cash and debt.

The erstwhile fund, which used to maintain an exposure of 75%-80% in large caps, will need to reduce its exposure and move to midcap stocks. Thus, investors who continue to hold their investments will need to prepare for additional volatility. Midcaps, though volatile, also have the potential to deliver supernormal returns if carefully picked. Thus, existing investors should keep a long-term outlook.

The fund continues to be managed by ace fund manager Mr Sankaran Naren.

Click here to read the complete note...


How To Invest In Direct Plans of Mutual Funds Online & Offline

Best Mutual Funds to Invest In 2018? Read This First!

Financial Terms. Simplified.

Yield Curve: A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates, and it is also used to predict changes in economic output and growth.

(Source: Investopedia)

Quote: "The stock investor is neither right or wrong because others agreed or disagreed with him; he is right because his facts and analysis are right.”‒Benjamin Graham

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