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Recalibrating Investment Strategy to Adjust For Rising Inflation

Investors with relatively lowest risk appetite may consider taking exposure in Debt Mutual Funds, especially long duration funds.

Mr. Nityanand Prabhu, Executive Director & Business Head, LIC Mutual Fund
Mr. Nityanand Prabhu, Executive Director & Business Head, LIC Mutual Fund

May 2022 has been an eventful month with the Reserve Bank of India (RBI) surprisingly increasing the benchmark repurchase rate (repo) by 40bps. The financial markets were quick to react to the RBI action. The 10-year benchmark 6.54%-2032 bond yield rose 26 bps to 7.3783% on the day of the rate hike. The stock market, still reeling under the rate hike, was jolted again when data showed consumer-price inflation accelerated at the fastest pace since 2014. Retail inflation jumped to 8-year high of 7.79% in April weakening the financial markets. By 13th May, the Nifty 50 fell to 15782, or 13% lower from its close on 4th April. 
The worst may not be over yet If experts are to be believed because the latest inflation print doesn’t factor the impact of high commodity prices. Inflation is now the top priority for central banks world over. As for the investors, rising inflation resulting in falling purchasing power is now the fulcrum of investment strategy recalibration.

Why one may look at Debt Mutual Funds?
We believe we have entered a rising inflationary regime which needs a recalibration of the investment approach and strategy. Investors with relatively lowest risk appetite may consider taking exposure in Debt Mutual Funds, especially long duration funds. The 10-year G Sec Bond yield, currently hovering above 7.39% (as on 23rd May 2022), might touch up to 8% in the absence of RBI intervention. LICMF offers multiple option in this category like LICMF Bond Fund, LICMF G-Sec Fund & LICMF G-Sec ETFs. One may consider locking capital as yields gets closer to 8%. 

Inflation is expected to keep equity markets edgy in the near-term. Investors with relatively high-risk appetite may look at equity mutual funds like a LICMF Large Cap Fund or LICMF Large & Midcap Fund. Investor with relatively lower risk appetite may consider investing in LICMF Balanced Advantage Fund (LICMFBAF), LICMF Debt Hybrid fund and LICMF Equity Hybrid Fund. In LICMF BAF, the fund invests in mix of equity & debt instruments and the asset allocation happens dynamically depending upon the market trend and valuations. Balanced Advantage Fund category may be successful in highly volatile markets.  

Why one may look at Equity Mutual fund?
Indian equity market is in rising trend if we look on a longer period horizon. On the global front, india is the fastest growing economy. Our macro economic indicators are better than many other Emerging Markets. India is preferred investment destination for FIIs who are facing low gdp growth and high inflationery pressure in their host country. On the domestic front, India benefits from large consumer base, favourable demography of younger population than any other country, rising rural demand explosion coupled with binge purchasing phenamenon of urban population. Rising income levels and expanding high middle class segment will drive growth going forward. All these aspects make India a strong case for future economic super power. India is ready for an upmove.

To conclude, retail investor needs to be cognizant of rising inflation and its resultant impact on their income and wealth. Investors should be equipped with investment strategy to combat the ghost of the past i.e. the rising inflation caused from the Pandemic. An option could be to invest in Equity Mutual fund which has a track record of generating returns higher than inflation. Investor with relatively lower risk appetite may look at Balanced Advantage Fund or other Hybrid categories for investment. While investors with lowest risk appetite may consider Debt funds. Ultimately retail investor’s sole objective should be to invest money in assets that increases the value of their money faster than the devaluation caused by the rising inflation. Investment through SIP is the simplest way to benefit from market volatility and to create long term wealth creation.

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Disclaimer: This disclaimer informs readers that the views, thoughts, and opinions expressed in the article belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
 

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