Sensex loses 1,200 points; Should mutual fund investors be worried about the Fed?

India’s stock market is extremely nervous about the future after the US Fed said on Wednesday it would start raising interest rates from March. It seems that the US central bank is extremely concerned about inflation and they believe that the strong data on growth and employment would give them enough room to raise interest rates.

Now the big question: Should Indian mutual fund investors be worried about the Fed’s decision?

As you can see, Indian market participants are also looking to the US Fed for clues about future rate hikes and interest rates in the economy. It is now almost certain that easy money politics will soon be a thing of the past. The American Fed will stop its bond purchase program from March. This means that liquidity will be reduced. It also means companies will soon have to pay more for funds.

India has never had such ambitious distributions and zero interest rates in the economy. Thus, the impact on the Indian market would be mainly limited to the participation of foreign funds. Foreign funds would now have the opportunity to invest in lower-risk bonds and earn more. This would lead to juggling, but will foreign funds avoid Indian stocks? Not really. These funds will start playing it safe again.

The US market is likely to come under pressure and this will impact sentiment in the Indian market. Additionally, mutual fund investors who have invested in US stocks and indices should be prepared for some heat.

Finally, what should Indian mutual fund investors do? After the big run of the past two years, most investors have braced themselves for some volatility and consolidation. The new Virus variant and its spread raised hopes for a delay in rate hikes and tighter liquidity. Finally, the time has come to face reality.

So what is the reality? The market is likely to go through a correction and consolidation. This may punish stocks with high valuations, but nothing else to support it. There is moss in the market and it will be a difficult time for investors in such ventures. Overall, investors swear by the resilience Indian companies have shown during the pandemic. They believe that these companies will be rewarded by the market.

In short, if you invest in good mutual funds based on your risk profile, keep investing. Remember it’s time to play it safe. Don’t be adventurous and try to chase returns.

Dolores W. Simon