RBI has increased the repo rate by 50 bps to 4.9% in its June meeting, owing to the increased inflation due to global geopolitical reasons. RBI expects that inflation will remain above 6%. It means increased volatility in the equity markets in the short term. Inflation means the purchasing power of the general public reduces while the income remains stagnant. Investment is very crucial for achieving your life goals. But inflation is the enemy of returns. If your returns on an investment are 8% and the inflation is 6%, means your real returns are 2%. To counter this, RBI is expected to increase the repo rates further up to 100 or 150 bps. This means that borrowing will become expensive and liquidity will be sucked out of the market. Liquidity in the market was one of the main reasons for the bull run in the market. So, the question arises is whether to focus on the long-term story and stay invested or to switch to different assets and pick new asset classes.
Housing Loans will become more expensive with rising rates. It means that the cost of acquiring a real estate property will become more expensive. We may see a slowdown in the real estate sector. In such a case, one can look at real estate and infrastructure funds to invest in.
Since the inflation surge past 6%, investing in the fixed deposit has generated negative real returns. It is not advisable to invest in Fixed deposits in such a high inflation period. The debt asset class includes instruments like liquid funds and overnight funds, which have become more lucrative to investors for parking their surplus in short term. Within the fixed income space, investors prefer these securities because these funds include securities having maturities as low as 1 day. This means low risk. Also, with increasing interest rates by RBI, the returns generated from these funds may increase.
This is a market where you would want to avoid mid-cap and small-cap securities and focus more on large-cap funds. The market is expected to remain volatile in short term. Avoid expensive stocks and invest in undervalued or underperforming stocks. Gold is a hedge against inflation. It may not beat inflation always, but its returns usually follow inflation and offer steady returns. India’s 10-year bond yield has crossed 7% and as of 10th June’22 giving 7.518% returns owing to a rise in repo rate. It has moved up by almost 106 bps with the start of the year. Bond yields have reached the highest in 3 years.
Looking at the current market, it is very important to understand your risk profile, investment tenure and your goals before investing. Just going after returns and choosing high-risk assets will lead to your wealth erosion. It is not advisable to invest aggressively in a single asset class in such times. One should continue their SIP plans and invest in a lump sum when the market sees a correction. Prudence is required at this point.
