The Reserve Bank of India (RBI) has retained its status quo on the repo rate and reverse repo rate in its monetary policy review on June 08, 2023, announed by RBI Governor Shaktikanta Das. This means that the repo rate remains at 6.5% and the reverse repo rate remains at 3.35%.
The RBI’s decision to retain the status quo is a sign that the central bank is comfortable with the current monetary policy stance. This is positive for the Indian economy, as it will help to support growth and inflation.
Some experts believe that this is a positive development for debt mutual funds, as it will help to keep interest rates low and support the growth of the bond market. Others believe that the RBI should have cut rates further, as inflation remains a concern.
It is a pause, and the possibility of the next move being cut is far higher than that of a hike. Growth remains resilient and inflation while moderating now, could rise in the future as labour market remains tight and the wage-inflation spiral remains a distinct danger. Australia and Canada have raised rates after a pause, said Sandeep Bagla, CEO of Trust Mutual Funds.
“We are not out of the woods yet. Liquidity surplus will have to be reduced as Rs 2,000 notes seep into the banking system liquidity. Market yields may rise by a few basis points as RBI waits for more economic cues amidst continued global contradictory cues on inflation and growth fronts,” added Bagla.
However, the RBI’s decision could also have a negative impact on debt mutual funds. This is because debt mutual funds are sensitive to interest rates. When interest rates rise, the value of debt mutual funds falls.
As a result, it is important to be cautious when investing in debt mutual funds now. It is advisable to invest in debt mutual funds with a short-term horizon. This will help to mitigate the risk of interest rate rises.
Ultimately, whether or not it is good to invest in debt mutual funds now depends on your circumstances and investment goals.
For short-term investment, here are the top debt fund categories to consider:
1. Liquid Fund — It invests in money market instruments with a maturity of less than 30 days.
2. Dynamic Bond Fund — It invests in a mix of debt instruments, including corporate bonds, government securities and money market instruments.
3. Ultra Short Duration Fund — It invests in debt instruments with a maturity of less than 91 days.
4. PSU Debt Fund — It invests in a mix of government bonds and corporate bonds issued by banks and public sector undertakings.
It is important to choose a debt fund that is suitable for your investment objectives, risk profile and time horizon. Also, choose the fund not by just looking at the past performance, as past performance is not a guarantee of future returns.
However, it is better to do your own research and check the credit rating of the debt and money instruments held in the portfolio of the fund. Also, consult with a financial advisor before investing in any debt mutual fund.