Returns from a mutual fund scheme are influenced by a range of factors. Some of these, like portfolio composition, fund manager decisions, and the investment strategies in play, are within the fund’s control. However, others can lie beyond it and depend on broader market conditions and government policies. One such external factor is interest rates. Let us explore how fluctuations in interest rates can affect mutual fund return rates.
From a broad perspective, interest rates can refer to the cost of borrowing or the return on investments. It could be the interest you pay on a home loan or credit card or what you earn on a savings account or fixed deposit.
In the context of mutual funds, interest rates usually refer to benchmark rates set by the Reserve Bank of India (RBI), such as the repo rate and reverse repo rate. These rates influence the broader financial system and act as the foundation for most lending and investment decisions.
Interest rates fluctuate over time due to various factors, including inflation, demand and supply of money, and the government’s need to support economic growth. The RBI may adjust interest rates based on its monetary policy. For instance, if the RBI wants to boost liquidity in the economy, it may lower interest rates. Conversely, it may raise rates to control inflation.
These changes can impact multiple aspects of the finance industry, including the cost of borrowing, spending, and mutual fund returns.
Interest rates can impact different types of mutual fund schemes in different ways, as explained below:
Interest rates can also influence market sentiment, which reflects the overall mood or outlook of investors. Typically, when interest rates rise, borrowing becomes more expensive, which negatively impacts consumer spending and investment.
In contrast, market sentiment tends to improve when interest rates are low. Cheaper borrowing encourages consumers and businesses to spend and invest more. As businesses grow, they become more profitable, and these profits are passed on to shareholders, leading to a positive market sentiment.
While you cannot control interest rate changes, you can follow a few strategies to ensure your mutual fund investments are not heavily impacted by them. Here are a few tips that can help:
Conclusion
Understanding the correlation between interest rates and mutual fund performance can help you make more informed investment decisions. Interest rate fluctuations are closely linked to mutual fund return rates. They can affect several factors, including your overall returns and investor sentiment. However, with the right approach, you can navigate these changes effectively.
An investor education initiative by Edelweiss Mutual Fund
All Mutual Fund Investors have to go through a one-time KYC process. Investors should deal only with Registered Mutual Fund (RMF). For more info on KYC, RMF and procedure to lodge/redress any
complaints, visit - https://www.edelweissmf.com/kyc-norms
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME-RELATED
DOCUMENTS CAREFULLY
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.