After effectively hiking key interest rates cumulatively by 290 bps since April last year, the Reserve Bank of India (RBI) finally paused. Though inflation is at an elevated level and is yet to come down to the band wanted by the RBI, it’s anticipated that the peak is well and truly over. In other words, we are almost at the end of the interest rate peak, and this has fanned questions as to whether companies should invest business money in long-term debt mutual funds. Let’s find out.
What are Long-term Debt Mutual Funds?
Long-term debt funds are mutual funds that invest in bonds or other debt securities with longer maturities, typically ranging from 5 to 10 years or more. These funds aim to generate returns for investors by investing in higher-yielding debt securities with longer maturities, which typically have higher interest rates than short-term bonds.
The fund manager may also actively manage the fund’s portfolio by adjusting the allocation of different types of bonds or securities to optimise returns and manage risks.
Is it Prudent for Corporates to Invest in Long Term Debt Funds?
While investing in long-term debt funds can spell multiple benefits for corporates, it’s vital to have a holistic understanding of the current situation before investing company money in these funds.
- Rates Can Go Up in Future
Though the central bank has not hiked rates in its latest monetary policy meet, future rate hikes can’t be ruled out. Yes, they may not go up substantially, but if inflation doesn’t come down within the comfort range of the RBI, the apex bank will not shy away from hiking rates.
If it happens, long-term bond funds will take a hit due to the inverse relationship of interest rates and bond prices, i.e.bond prices go down when rates increase and vice-versa. No one can say with absolute certainty that rates will remain stagnant going forward. So, it’s better to adopt a wait-and-watch approach before pouring money into long-term debt funds.
- Volatility is Still Looming Large
Financial instability in global markets due to the collapse of major banks has brought the focus back on volatility. The Russia-Ukraine war is not helping matters either, and in this scenario, central banks worldwide can walk on the path of fiscal consolidation.
If it happens, the RBI will not shy away from hiking rates again and this can catch corporates putting money in long term debt funds off guard. A hike in rates will bring down returns, resulting in losses.
A Tricky Investment Choice
Investing company money in long term debt funds can be a tricky affair as they are susceptible to interest rate hikes. Only if you can gauge rate movements and time your entry and exit, will you be able to make the most of these funds. However, doing so for corporates is challenging as it’s not easy to predict the actions of RBI and keep a track of macro economic factors.
Even if you can do it, you must be prepared to hold onto your investments through an entire interest rate cycle, as getting out of them in a hurry can result in losses. Hence, it’s essential to tread with caution.
To invest idle business money in debt mutual funds, you can bank on Shootih – India’s First Business Wealth Management Platform. With Shootih, you can invest in a range of mutual funds as per your goals and risk tolerance. To schedule a demo call with our expert, click here.
Disclaimer: Mutual fund investments are subject to market risks, please read all scheme-related documents carefully.
The content of this blog is not intended to serve any professional advice or guidance and Shootih takes no responsibility or liability in whatsoever manner for any investment decisions made by the readers of this blog or other blogs. Readers should seek independent professional advice before making any investment decision based on the information provided on this website.
