We all are experiencing market volatility, geo-political tensions & uncertainty, rising inflation where our daily expenses have crossed their usual expense boundaries, on top of it, RBI made a decision to increase repo rate & CRR few days back…
Whole world has still not come over deadly pandemic yet.
Market bounced back soon after the strict lockdown was lifted but now due to all these reasons, it has started showing volatility yet again.
All this has directly & indirectly impacted our investments & portfolio along with cashflows.
Is it a time to review them?
Let’s first understand the reasons behind this current situation, why & how you can review your portfolio.
What are the reasons to market volatility & rising inflation?
- Retail inflation has touched 7.8% in April 2022-
Increasing crude oil prices, increased transport & communication costs, lower factory output growth @ just 1.9% in march, signaling weak domestic demand, stress on supply chain due to increasing geo-political tensions has made ‘retail inflation’ to peak up highest at 7.8% , in last 95 months.
- US Fed rate hike:
Reasons which are causing inflation are also causing volatility in the markets but there are some additional reasons too. USA which is one of the strong economies has been facing high inflation since long. It has compelled to raise interest rates by half a percentage point to a range of 0.75- 1%.
US inflation has touched 8.5% , highest since the year 1981.
When there is a hike in interest rates, means FIIs will face increased cost of borrowing, which in turn add cost towards production, employees etc.
- Depreciating rupee:
When we compare rupee with that of US dollar, it has been depreciating since few months. Last week it touched low of 77.63 against US Dollar.
Economists expect it to decline further.
We import almost 80% of our crude oil. Crude oil prices are not coming down at all. With domestic inflation, global supply chain disruptions, rising oil prices are putting pressure on our current a/c deficits. This is adding more pressure on rupee.
- Repo rate hike by RBI:
The reserve bank of India last week, increased repo rate by 40 basis points making it to 4.40% & increased CRR by 50 basis points making it to 4.50%.
RBI took an anticipated decision to curb inflation.
But due to this, businesses will find it costly to borrow as rate of interest on loans will rise in response to this rate hike.
Investments in fixed income instruments like bank FDs will see positive change. Investment in existing debt funds will see negativity as they share ‘inverse relationship’ with repo rate changes.
Should you review your cashflows:
Cashflows on expenses side will see a rise due to higher inflation, high cost of borrowing.
If you have ongoing home loans, car loans etc, then you will soon be asked by your bank to either raise EMI amount or increase the loan tenure.
Increasing tenure means paying more interest, so better to accept higher EMI payment. Nowadays, all loans are linked to external benchmark rate i.e. Repo rate which shares direct relationship with that of loan interest rates by banks.
However, each bank has its own way to react to this repo rate change but they will react in some way or the other for sure.
Talking about other costs, daily food & non food items are also facing a hike in prices. So, your monthly budget will see a stress.
If you are not drawing a budget, then please start drawing it. It will help you to spend within limits & on really required items.
IF your income flows are still volatile, then budgeting is a must!
Should you review your equity mutual fund investments?
The answer is case sensitive.
We all are aware that ‘equity mutual funds’ invest in equity. Underlying portfolio of every scheme changes as per the respective scheme objective.
When market is facing volatility, equity mutual funds also go red. The impact on the scheme is case sensitive as it depends on the category in which the scheme falls in, fund managers decision & prediction about the future movement of the market.
If you have invested in equity mutual funds as per your goals, risk appetite & tenure, then you should have a look at your portfolio. If your portfolio is meant for long term goals where you have substantial time in hand, then you should stay invested. If you have ongoing SIPs, then please continue as you will get rupee-cost averaging during this time.
If goals are medium term, then revise your schemes. If you have less than 5 years, then you can change the scheme category from riskier one like small caps to comparatively less risky schemes like large caps. You can also allocate a certain percentage of your portfolio to suitable very short-term debt funds.
However, if you have made investments in equity funds on ‘random Basis’ then, please get your portfolio reviewed by the adviser who can give unbiased opinion.
Should you review your debt mutual funds?
Debt mutual funds are the category of funds where people in general, invest money as they think it is ‘safer’ than equity. But, it is not!
Debt mutual funds work on altogether different mechanism, have different kind of underling assets & get impacted by various economic changes.
Due to recent ‘repo rate hike’, debt funds have already started going negative! Why so?
Repo rate & debt mutual fund returns have ‘inverse relationship’!
Let’s see, how…
Due to increased inflation, Reserve bank of India increased repo rate by 40 basis points, so now it is 4.40%.
When repo rate is increased, bonds or debt papers which are already available in the market & which are offering ‘lesser rate of interest’ than this, face the hit. New debt papers & bonds come in the market with new & higher rate of interest.
Debt funds who already have debt papers & bonds with lesser return offerings, face the hit due to this. So, they share ‘inverse relationship’.
Here, existing debt fund investments will go negative.
On the other hand, underlying debt papers of debt funds, come with certain maturity as per the respective scheme objective. Longer term maturity funds like ‘gilt funds’, face higher negativity compared to shorter term maturity schemes like money market funds & liquid funds.
If you have invested in debt funds, as per your goals, risk appetite & tenure with due consideration to tenure of the debt funds along with credit quality, then you should not worry.
IF you have shorter term debt funds like liquid funds, money market funds, ultra short term debt funds, then you will see lesser negativity compared to investments made in corporate bond funds, gilt funds etc.
Please understand, debt fund investment in medium or long duration funds, if you have made as a safe heaven or to get little more return than FD, then please review your debt portfolio now.
Hire an expert who can review & guide you in unbiased way.
About your fixed income investments:
Yes, fixed income investments are important part of our portfolio. There are some investments which have a back-up of government security like Public provident fund
Then there are bank fixed deposits, corporate fixed deposits, tax free bonds etc.
Small saving schemes like postal investments or PPF are reviewed & revised every quarter.
Bank FD, where majority of people, especially senior citizens invest their money, has direct co-relation with repo rate changes.
Banks will now revise their interest rate offerings on bank FDs. We have experienced lower returns from FDs since last few years but now we can see the positive upside to it.
IF you have your investments in bank FDs, then it’s a good sign.
But, please remember, bank FDs and corporate FDs are not ‘risk free’. They do come with their own risk manual. They also attract taxes as per investor’s tax slab.
I ask you to keep this in mind before investing in FD.
Everyone invests & spends as per own knowledge, money available & capacity. Its always better to have a person who can work as a ‘financial companion’ with you & guide you in unbiased way. Better to have a financial planner for you because ‘Managing money & personal finance is a journey!’
There are some events which are predicted where some are beyond our prediction. They do leave positive or negative impact on our money & also give a lesson to learn & share with others!