RBI MPC decision: How should mutual fund investors tweak their portfolio strategy after 25 bps rate hike?

RBI Governor Sanjay Malhotra on Wednesday announced the central bank’s first rate hike in nearly four years, raising the benchmark repo rate by 25 basis points to 5.5%. Market experts believe mutual fund investors should continue their SIPs and stagger lumpsum investments over the next few months.

Nirav Karkera, Head of Research and Fund Manager at W by Groww, said investors should continue their SIPs and stagger lumpsum investments through STPs over a few months. Investors who increased their exposure to small-cap or thematic funds during the rally should consider trimming it, while borrowers with repo-linked loans should expect EMIs or loan tenures to rise.

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Karkera further said that in fixed income, investors should build the core through accrual-oriented, quality funds in the 1- to 5-year maturity range. With government bond yields around 7%, investors are well paid to wait, and it is too early in this cycle to bet on long-term bonds.

For equities, Karkera said this looks like a cyclical correction rather than an earnings problem. June-quarter profits grew in the mid-teens, and closer to 19% excluding commodity companies. From here, returns will track earnings. “Large caps make the best core, as the only segment trading below its long-term average. Mid and small caps belong in the satellite, added selectively and in stages.”

The repo rate was last raised in February 2023, by 25 basis points to 6.50%.

The latest rate hike marks the first such move under Governor Sanjay Malhotra, who took office in December 2024 and oversaw a series of rate cuts last year. The RBI’s revised stance “underscored that, given current conditions, rate cuts are off the table in the near term, with policy action limited to a hike or a pause, depending on evolving conditions,” Malhotra added.

“The duration and extent of the rate hike cycle would be contingent on the actual growth-inflation developments and outlook, especially that of underlying inflation, the extent of broadening of price pressures and second-round effects of the supply shock, as also the impact of demand impulses,” Malhotra said.

For debt investors, the near-term environment remains characterized by uncertainty around both the terminal policy rate and the pace of liquidity normalization. In such a backdrop, the focus should be on capital preservation rather than aggressively chasing carry. Investors may consider parking incremental allocations in liquid funds or high-quality low-duration strategies while the policy outlook evolves, said Sneha Pandey, Fund Manager- Fixed Income, Quantum AMC.

Pandey also said that where dynamic bond funds are being evaluated, investors should pay close attention to the source of risk being taken. Interest-rate risk is unavoidable in a volatile rate cycle; adding significant credit risk on top of duration risk may not be adequately compensated. Preference may therefore be for portfolios with prudent accrual strategies, strong credit quality, and disciplined risk management rather than those seeking excess yield through layered risks.

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What other analyst say

Anurag Mittal, President & Head - Fixed Income, UTI AMC: The RBI is normalising rates to keep real rates positive rather than materially tightening financial conditions, and with close to 100 bps of hikes already priced in, most of the adjustment in yields is behind us. Investors should move into 2–4 year and moderate duration funds like short term or corporate bond funds where current yields are highly attractive between 7.8-8% without meaningful duration risk.

Vijay Kuppa, CEO, InCred Money: While today’s rate hike was largely anticipated, current market valuations continue to present a buying opportunity to investors in a staggered manner. The next few months will be particularly important because the direction of crude prices, inflation and the rupee will determine whether today’s move is a one-off adjustment or the beginning of a broader normalisation of monetary policy.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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