How to get benefit from interest rate cut?

How to get benefit from interest rate cut?

These types of questions commonly asked and discussed in the investors or fund managers forums. What should you do in current scenario when majority of analyst expect rate cut within a year as government’s fiscal deficit number and Indian rupee dollar exchange rate also improving. We have already seen rupee dollar exchange rate around 60 and expected even below from current 60.

As a gilt fund are most interest rate sensitive so to take advantage from interest rate cut investor should go with these types of fund. Although it is tough to predict when rate cut will happen so there may be some wild moment happen in NAV of these types of fund. But if you have time horizon around 2 year you should definitely go with long duration fund to take advantage of interest rate fall. There are chances of double digit return from the long duration fund.

For example, if fund’s yield to maturity (YTM) is 10% and modified duration is 3 year. In this case if interest rate cut by 100 bps point then the total return would be (YTM+Modified Duration) 13% and if interest rate go up by 100 bps then the return would be 7%. If the interest rate remain unchanged, in that case investor earn around 10%. The return is totally depend on interest rate movement.

Many fund house like Franklin Templeton, Birla Sunlife, IDFC, HDFC etc. offering very attractive debt funds. Investor should have the patience to wait for the rate cut. For those who do not have risk appetite and cannot wait for one and half or 2 year, those investor should invest in short term bond fund.

If you have more than one year time horizon and do not want take any risk in that case you should go with FMPs (Fixed Maturity Plan) as it give indexation benefit also.

For all our investors and readers Happy Navratri, Happy Nav Vikrami Samvat and Happy Gudi Padwa. I wish for all of you happy and prosperous life. If you want more information regarding investment or you have any other query about investment feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

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Will RBI going for another rate cut......?

Now market experts, industry leaders, economists are thinking about that “Is RBI going to another rate cut on this 18^th June ?” This is the big question in mind of everyone. The People’s Bank of China, the central bank, cut the official one-year borrowing rate by 25 basis points to 6.31 percent and the one-year deposit rate by a similar amount to 3.25 percent. Now that China has done, India which has seen its economic growth take a major hit, is now under more pressure to follow suit. Ever since RBI Deputy Governor  Subir Gokarn hinted that there is now more elbow room to cut policy rates thanks to lower global crude oil prices and weakening core inflation, hopes have been running high.
India’s economic growth slumped in the January-March quarter to a nine-year low of 5.3 per cent confirming an economic slowdown and sending negative signal across the industry. The disappointing GDP figures require an immediate action by the central bank while the market is also expecting the government to roll out certain measures.

In the last monetary policy, RBI cut the repo rate (its main policy rate) for the first time in nearly three years in April by a steeper-than-expected 50 basis points (100 basis points = 1 percentage point.) At that time, the central bank warned that further rate cuts could be difficult because of persistent threats to inflation from food and fuel prices.

Due to sharp slide in growth, there might be pressure on the central bank to place the issue of growth before inflationary concerns. While expectations for a rate cut grow, many economists and traders say only policy reforms by the government can revive growth. Now interest rate cuts by the RBI are only a quick fix to growth. Without fiscal tightening only rate cut in RBI monetary policy will likely increase inflation further and lead to economic instability.
Now time has come our government should make some major policy decision and should not depend on our central bank’s policy.

Regards,

Arvind Trivedi

Certified Financial Planner