Sensex down 1200 points; should mutual fund investors worry about Fed?

The Indian stock market is extremely nervous about the future after the US Fed said yesterday that it will start raising interest rates from March. It seems the US central bank is extremely concerned about inflation and it believes that the strong growth and employment data would give them enough room to hike interest rates.

Now, the big question: should Indian mutual fund investors be worried about the Fed move?

As you can see, Indian market players also look at the US Fed for clues on future rate hikes and interest rates in the economy. It is now almost certain that the easy money policy will be history soon. The US Fed is going to stop its bond buying program from March. That means the liquidity will be squeezed. It also means companies will have to pay more for funds soon.

India never had such ambitious dole outs and zero interest rates in the economy. So the impact on the Indian market would be mostly confined to foreign fund participation. Foreign funds would now have the option to invest in low risk bonds and earn more. This would result in some juggling, but will foreign funds eschew Indian equity? Not really. These funds will once again start playing it safe.

The US market is likely to be under pressure and it will have an impact on the sentiment in the Indian market. Also, mutual fund investors who have been investing in US stocks and indices should be prepared to face some heat.

Now, finally what should Indian mutual fund investors do? After the great run in the last two years, most investors have been bracing for some volatility and consolidation. The new Virus variant and it spread raised hopes of a delay in rate hikes and liquidity tightening. Finally, the time has come to face reality.

So, what’s the reality? The market is likely to go through a correction and consolidation. It may punish stocks with lofty valuation but nothing else to back it up. There is froth in the market and it will be a trying time for investors in such companies. Overall, investors swear by the resilience shown by the Indian companies during the pandemic. They believe such companies will be rewarded by the market.

In short, if you are investing in good mutual fund schemes based on your risk profile, continue with your investments. Remember, this is time to play it safe. Don’t be adventurous and try to chase returns.