Federal Reserve may hike interest rate

The Federal Reserve is likely to hike interest rates in December. That raises a big question in the mind of debt mutual fund investors: when the USA is going to hike rates, will Reserve Bank of India cut rates? A rate cut is happy news for debt mutual fund investors, especially in long-term debt mutual funds. When yield falls, bonds prices rise, pushing up the Net Asset Value (NAV) of the schemes. That is why a pause or rate hike is not music to debt mutual fund investors.

Lakshmi Iyer, CIO – debt & head of products, Kotak Mutual Fund, believes shrinking of Fed balance sheet is more important than the rate hike news. “We never expected a rate cut in October. But I am not ruling out a rate cut completely in December. A lot depends on the data,” she says.

According to her, debt mutual fund investors need not make any changes at this juncture. “Those who are already invested should continue with their investments. Fence sitters can consider making investments at the current yield,” she says. Bond yields have moved up in the money market after a series of bad news, notably the news on additional expenses by the government. The 10-year government bond is currently quoting at 6.66 per cent.