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| Picture depicts RBI's logo and Repo Rate Visual |
Actual Question:
How does RBI repo rate
affect the performance of debt mutual funds?
Answer:
Dear Friend!
Reserve Bank of
India’s (RBI’s) ‘Repo Rate’ strongly influences the lending rates of commercial
banks. If the repo rate is cut, the lending rates fall. On the other hand if
repo rate is increased, the cost of borrowings go up.
How RBI’s repo rates will affect the performance of debt mutual
funds is difficult to predict. One simple logical expectation is that if repo
rates go up, the floating lending rates will go op and will positively impact
the banks and other lending institutions and therefore, indirectly, the
prospects debt mutual funds. But fixed interest rate loans are not affected.
Mostly bonds, government securities, treasury notes are fixed interest rate
instruments and debt mutual funds predominantly invest in such loans. In such a
scenario there are no gains or losses in the short and medium terms.
Yet another argument could be that a fall in repo rate and
consequently commercial lending rates to spur overall quantum of borrowings and
therefore the prospects of debt mutual funds could brighten.
Predicting the consequences of events like changes in repo rates
is not only difficult but fraught with huge risks. Therefore one should never
make investment decisions based on such events/ actions. One should make good
assessment about the fund, invest and simply leave it.
Anyway, friend, what are the special reasons for your interest
in debt mutual funds? Debt funds do not make the investor rich or wealthy.
There is no scope for increase in either recurring income or for capital
appreciation. Debt funds are suitable only for those who have a large corpus of
investible funds out of which one expects a regular income like charitable
foundations, universities, pension funds, rich individuals and generally not
for a majority salaried and middle income individuals. For them only well-diversified
growth funds or exchange traded funds are suitable to create wealth in the long
term.
Suggested Further Reading:
- What is Repo Rate?
- What are Repo and Reverse Repo Rates?
- How to Choose the Right Mutual Fund to Invest?
- Is there a Special Benefit in Being Invested For a Long Time in a Debt Fund?
- How can Investors Capture the Benefits of the Economic Prosperity of a Nation?
- What is an Exchange Traded Fund?
Thank you,
With Best Regards
Anand
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