Things can really change first in the investment world and unless we are monitoring our investments for these changes we can well be caught unawares. This happened to me recently and had led me to look at some changes in the way I operate with my investments. As part of my emergency fund, I had a small investment in a Liquid fund now for over 3 years. In the beginning the IRR used to be around 10 % and it came down to something like 9 % in 2015 first half. This week when I looked at it, post the rate cuts, I saw that the IRR was only 7.85 %. I have of course, redeemed the fund now.
Fortunately, the price paid for my negligent attitude was not high in this case and it was a good lesson learnt. It also set me thinking as to what will be the effect of the interest rate changes on my investments and whether there is a need to revisit some of my investment decisions made earlier. One thing is clear – we are not looking at a just one-off rate cut here, there is every possibility that we are in the beginning of a low inflation, low interest rate cycle. This will definitely have an impact on my own situation in terms of my current passive income, my current investments and my future needs.
Let us see how each of these are likely to be affected:-
- My passive income is made up of interest from tax free bonds, rental income, capital gains from debt funds (mostly FMP) and dividends from stocks/MF.
- Out of these the capital gains from debt funds can get affected positively for debt funds with maturity periods of more than 3 years as interest rates decline. The others including FMP will really be immune to the rate changes.
- If I take my retirement to be 8 years away, it is likely that the level of inflation will reduce and this will hopefully mean that I need a lower corpus to retire with. However, my policy has always been to assume a zero rate of real returns in the post retirement period. With this conservative approach in place, the retirement corpus I look at is pretty much the same for all levels of inflation.
- As far as my investments go, there will be serious implications there, mainly in the following areas:-
- The PPF rates will decline significantly to 8 % or less and this will impact my corpus to an extent.
- I have some investments in debt funds, other than the FMP variety. These will have lower returns for the Liquid and short term funds and a slightly higher return for the longer term funds.
- The FMP returns will be largely unchanged for the ones which I will redeem at maturity. For the few which I need to roll over because of tax purposes, the returns will definitely get lower.
- Equity performance should generally improve over this year and the next few years.
Based on the above, the following are the actions I will take on my investments:-
- Keep my investments in PPF going on, even at lower rates this is going to be one of the better instruments.
- Redeem all Liquid and short term debt funds, returns from these will get progressively worse with time.
- Not invest in any future FMP as it does not make sense any longer. Any redemption from existing FMP, I plan to put the capital amount in longer term debt funds and/or Arbitrage funds.
- As I said before, for MF investments I will stop my standard SIP and look at targeted one-time investments, which will largely be done in an overall manner.
- As money becomes available from debt redemption, I plan to keep investing more in equity over a period of time.
- In the above scenario, while the overall returns on my portfolio can get lower, my cash availability will be high. I am therefore looking at going on a vacation to South Africa next year and hopefully pay for my daughter’s MBA from my own resources, should she be getting into a good institute.
I suggest you do this exercise for yourself and see how your investments are likely to get affected and therefore, what investment decisions and actions you need to take. Remember, this can very well be the beginning of a different cycle in our economy and business. Changes are absolutely required, only question is what and how.
In the next post, I will write on the outlook of medium and longer term inflation and how it can affect each one of us.