How Should Investors Counter the Rise in Interest Rates?
Over the past few quarters, the rise in interest rates has been steady and gradual. Not only has this created a climate of grave economic uncertainty but it has also rendered various financial instruments unviable. Deposits and loans have become more expensive and investors have largely begun to worry about how this increase would affect their portfolio.
However, dealing with rising interest rates is not as challenging a task as it appears to be. All you have to do is widen your monetary avenues and explore newer investment options. Here are a few ways which can help you stay secure even in the most unpredictable times.
Exit Debt Funds
If you are invested in long-term debt funds, it would be wise to exit them as early as possible. When interest rates rise, bond yields tend to decrease. This inverse relationship between them causes any type of long-term investments to become extremely volatile and unsustainable. Thus, shifting towards short-term and liquid funds in this period would be a more prudent decision.
Quit Low Rated Bonds
One of the best ways of dealing with rising interest rates is to withdraw from any low rated corporate bonds that you may have been invested in. If the rating of the bonds ranges between AAA, AA, A and A+, there is no harm in holding them. But, bonds with ratings that vary from B to D will face major problems in managing their debts during an interest rate increase. Thus, it is wise to quit them.
Consider Fixed Deposits
The rise in interest rate can make investing in fixed deposits a great investment idea. This is because the returns earned on fixed deposits tend to increase with the rate hike. However, do not break old fixed deposits if the rate increase is not sizable enough. For instance, reinvesting would make sense if the interest increases from 6% to 8%. If it merely rises to 6.5%, the charges you will incur for premature withdrawal will be much higher than the gains you might make from the rate growth.
Go For Savings Schemes
Savings schemes and other such alternative investment options can prove to be an asset during this time. Most of them provide higher interests with the rate hike, are extremely tax efficient, and have the capability of generating substantial returns. Similarly, placing your money in hedge funds, derivatives and real estate would also be a good investment option.
Appropriately dealing with rising interest rates in a time of gloomy economic forecasting, requires due diligence and thrift. You need to be very careful about the specifics of your investment portfolio. If possible, settle all your loans before the interest rates rise, but simultaneously, keep a track of how other financial instruments are performing. This is the only way to navigate this rough economic terrain with foresight and caution.