How a U.S. Federal Reserve rate cut will affect your stock mutual fund portfolio

With the Federal Reserve cutting interest rates by 50 basis points, mutual fund experts believe investors should focus on thematic issues. mutual funds with greater allocation in flexible capitalization and multi-capitalization funds.

“With interest rates coming down, technology, financials, housing and consumer discretionary stocks are likely to perform well. Therefore, thematic mutual funds focusing on these categories are expected to perform well. However, investors should not go overboard on these categories. They should continue to have a higher allocation in flexible-cap or multi-cap funds and let the fund manager take care of the stock selection,” said Rajesh Minocha, Certified Financial Planner (CFP) and Founder, Financial Radiance.

The expert believes that asset allocation at this time is very important when the markets are jubilant and pessimistic.

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“Asset allocation is very important both when markets are buoyant and when they are pessimistic. Hedge funds such as thematic funds should not be more than 8% to 10% of the total portfolio,” he added.The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has also kept the policy rate at 6.50% from April 2023. The central bank has continued to maintain the policy stance of “withdrawal of accommodation”.

Since inflation is within the RBI’s target range, is the central bank also expected to follow suit?

“The RBI is also likely to cut interest rates as inflation has been under control for some time now, but I think it will be done cautiously. As both the Fed and the RBI have already announced, interest rates will be reduced in a gradual manner, which is overall a very good sign for Indian markets,” Minocha said. US Federal Reserve will affect borrowing rates for consumers and businesses, resulting in lower costs for mortgages, credit cards and other loans.

This decision was taken after recent indicators suggested that economic activity has continued to expand at a solid pace. Job creation has slowed and the unemployment rate has increased but remains low. Inflation has continued to move toward the Committee’s 2 percent objective but remains somewhat elevated.

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The Fed said that “the Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and views the risks to achieving its employment and inflation objectives as roughly balanced.”

Since the Fed rate cut affects both global equity markets and bond markets, what impact will it have on the Indian stock market?

“The Fed’s 25 basis points interest rate cut was already priced in by the markets as interest rates were expected to come down to a controlled level of inflation and unemployment rate in the US. The recent resilience of the markets despite the geopolitical situation was a reflection of that exuberance. However, 50 basis points has been more than anticipated and this is positive for the equity markets, although they may still want to wait and watch for some further good news from both the Federal Reserve and the Reserve Bank of India,” Minocha said.

The US Federal Reserve cut its key interest rate by 50 basis points, bringing the rate to between 4.75% and 5.00%. This is the first rate cut since the Covid-19 pandemic.

(Disclaimer:The recommendations, suggestions, views and opinions of the experts are their own and do not represent the views of The Economic Times.