Interest rates

How are rising FD bank interest rates a challenge for stock market, mutual fund investors?

Portfolio Management: Amid the hawkish Reserve Bank of India (RBI) interest rate hike, various Indian banks have announced hikes in fixed deposit (FD) interest rates over the past few months. State Bank of India (SBI) recently announced an FD rate hike of up to 80 basis points, while Canara Bank announced an FD rate hike of up to 135 basis points. Apart from them, HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank are some of the lenders who have increased interest on time deposits recently. Today, two public banks, Canara Bank and Union Bank of India, offer 7% fixed interest rate on deposits. Thus, traditional bank FD rates should attract investors who had turned to equities during the post-Covid stock market rebound. However, the increase in bank term deposits will not make mutual funds and direct equity investments less attractive. But, from a portfolio diversification perspective, this would certainly present a challenge for equity investors, as debt mutual funds are expected to regain their shine in times of high bank interest rates.

Experts say amid RBI interest rate hawkishness, mutual funds should be seen as an attractive asset allocation option as the RBI is again expected to announce interest rate hikes. interest at its next meeting of the Monetary Policy Committee (MPC). They advised investors to consider higher accumulation schemes, dynamic duration schemes and floating rate bonds (FRBs), as these assets are expected to outperform other debt instruments in times of high interest rates.

Focus on mutual funds

Advising investors to look into debt mutual funds, Chintan Haria, Head of Products and Strategy at ICICI Prudential AMC, said: “Investors should consider debt mutual funds because debt is a that asset class looks very attractive. that inflation continues to persist above the RBI’s comfort level, a challenging global economy, high consumer prices, etc. (FRB). Investors should be aware that debt also has an important role to play in a portfolio and should not be ignored.”

Regarding mutual fund investors who are looking for an initial investment option, Chintan Haria of ICICI Prudential AMC said, “An investor considering a lump sum equity investment can opt for a balanced advantage or a multiple asset class.” .

Denying the chances of an aggressive hike in bank interest rates in India, Amar Ranu, head of investment products and advisory at Anand Rathi, said: “We saw the repo rate rise from 4% in April 22 to 5.9% in September 150bp hike which also led banks to raise deposit rates but so far they have not raised it aggressively. has managed inflation better compared to its global peers, we are almost at the top of terminal interest rates, barring another 35-50 basis point hike expected in the near future.”

Amar Ranu went on to add that banks will not raise the deposit rate aggressively yet unless they are crowded out by higher credit growth. So far, they have been able to manage with moderate increases in deposit rates. In the event that deposit rates increase aggressively, say to 8-9% and above, investors may be tempted to shift some of the money from stocks to fixed income securities to ensure certainty of returns.

“We advise investors to stick to asset allocation and not be swayed by high equity or debt returns. It is prudent to stick to equity allocation and debt based on investors risk profile and stay invested in both asset classes depending on investment horizon and objectives,” said Amar Ranu of Anand Rathi.

FD Bank vs Mutual Funds

For bank clients who have switched to mutual funds due to declining FD yields, Vinit Khandare, CEO and Founder of MyFundBazaar, said, “Not subject to inflation risk and FD yields are not Not tax-advantaged, FDs from banks may be suitable for low-risk investors however, returns should be measured in after-tax terms only.Compared to bank FDs, mutual funds are more flexible, liquid and tax-advantaged. Unlike DFs, mutual funds tend to benefit from higher inflation whereas, in the case of FDs, losses are obvious FDs offer limited choice because interest rates are fixed, depending on the chosen investment period, which can be between 7 days and 10 years.

Disclaimer: The opinions and recommendations made above are those of individual analysts or wealth management companies, and not of Mint.

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