With interest rates set to rise due to spiralling inflation, retail investors will perforce have to tweak their existing debt funds portfolio and plan new investments based on the time horizon. When interest rates rise, the value of existing investments in debt funds falls because then investors prefer to invest in a fund with higher rates.
Analysts expect the Reserve Bank of India (RBI) to hike the repo rates by 100 basis points in the current financial year. In fact, the bond market is factoring a 200 basis points hike in repo rate in the next two years, with terminal repo rates at 6%. The one-year bond yields are trading in the range of 5.10 – 5.20% and two-year rates are trading in the range of 5.80 – 5.90%.
