Look at Inflation & Interest Rates Before Returns on Investment (Part 2)

Posted On Wednesday, May 10, 2017


In our previous article, we wrote about inflation, interest rates and its impact on returns on investment.

Inflation and interest rates have a diverse impact on equity, debt and gold and the rate of return changes accordingly. All these 3 asset classes are impacted when inflation and interest rate changes.

Impact on Equity Funds-

Fund managers who manage an equity fund invest investor's money in stocks through stock markets. Though there are many factors responsible for the changes in the share prices, however interest rates play a vital role here. Interest rate changes as per the change in inflation rate. The rise in inflation pushes interest rate high and vice versa. Hence an unchecked rise in inflation is not positive news for stock price and therefore for equity funds. Here's how...

For example, manufacturing companies purchase raw materials to produce goods therefore rise in inflation pushes up costs for the company as the price of raw materials goes up. In that case if profit fails to grow in proportionate to the cost then bottom line (net profit) of the company decreases. Needless to say, stock price of the company is a mirror image of all these changes and tends to follow suit accordingly. Thus if for whatever reason the rise in cost cannot be passed in to the end customer, then profits fall, leading to a fall in share price.

Impact on Debt funds-

The returns from debt mutual funds are influenced most by interest rates and other factors like currency fluctuations, inflation rates, and the current account deficit of the government. Debt mutual funds invest in fixed income securities issued by the government and businesses. The prices of fixed income securities are governed by interest rates prevailing in the market. If interest rates increase then prices of fixed income securities decreases and vice-versa. A drop in interest rates will create more demand for existing bonds and increases the bond price and vice versa.

Impact on Gold funds-

Gold is a store of wealth. In a country like India, decision of investment in gold is an outcome of tradition, and not that deeply linked to the market driven factors and rationality. Investors buy gold only because other investments are not attractive. Generally, hike in interest rate or any negative news from any other asset class results in rise in investment for gold. Apart from the national economic and political scenario, gold price follows global economic, financial and political events. Indeed, it's not only inflation and interest rates but global economy; changes in the currency rates, political decisions (change in the export-imports quota) that have a deep impact on gold prices.

Understanding return on investment is not the ultimate goal. You should know the real rate of return. In a nutshell, you should minus return on investment from the current inflation rate to get a real return on investment. This would be the subject for our upcoming article.

Apart from inflation and interest rates, there are many factors which have an impact on return on investments, however, these two are major factors. Rise in interest rate is not a positive news for both equity and debt fund investors.

Keep visiting Quantum Direct for future articles!

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

Mutual fund investments are subject to market risks read all scheme related documents carefully.

Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

Above article is authored by Quantum.

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