High inflation & rising interest rates: Where should you invest

Where should I invest in a rising interest rate scenario? How can I protect my money from loosing its value? How should I manage my portfolio in a rising interest rate scenario? Inflation has reduced real returns, so how to beat inflation? In the current market scenario with rising inflation, rising interest rates, negative global cues and falling equity market, these are few of the many questions facing every investor. Investors, therefore, are in a fix as to where to invest their hard-earned money.

With headline inflation touching double digit figure, RBI has been trying hard to curb inflation through monetary actions by raising repo rate and reverse repo rate. But despite RBI's action, inflation has been rising at a steady pace and it is being revised every time with an upward bias. The impact of inflation on returns of the investors has been dampening. As inflation has risen steadily, real returns on the investors hard earned money has reduced and in certain cases has even gone negative. Equity markets are also quite jittery because of the number of scams cropping up in the country. Negative global cues, debt re-structuring by Greece, weak world-wide economic data are few of the many reasons which have only added to the chaos.

In this rising interest rate scenario, investors must invest in products like bank deposits , corporate bonds, fixed maturity plans , non-convertible debentures and debt mutual funds as currently they are offering high yield even in short tenure. These products vary on the risk-return profile and are conducive enough to suit every type of investor's profile.

"Rising interest rates pose a challenge to investors as equity and debt markets react negatively to rising interest rates. The key to successfully invest in a rising interest rate scenario is to become conservative and be selective in asset allocation," says Puneet Pal, fund manager debt, UTI AMC.

As investors lack time and expertise to manage their debt portfolio , they must look to invest in debt-oriented mutual fund schemes to avoid direct exposure to credit risk. Killol Pandya, head fixed income, Daiwa AMC, says, "A rising interest rate scenario is seen as a losing proposition by many investors. However, one can invest meaningfully and even make money in such phases. While capital appreciation opportunities are few, one may take advantage of reinvestment opportunities at higher yields and implicitly earn higher returns. To make this strategy more sophisticated, investors may do well to invest in assets with a short duration and thereby optimise returns. To avoid direct exposure to credit risk, investors should take the mutual fund route and seek to invest in debt funds which have robust asset quality and short duration."

There is an inverse relationship between the interest rates and the price (face value) of the bond. When interest rates go up, the value of the bond goes down. The bonds with long-term maturity are more sensitive to rate changes. Historically, rising interest rates have caused the prices of existing bonds to decline because newly issued bonds carry higher rates, which push down the value of previously issued securities. Bonds with shorter maturity generate good returns. So you can switch your investments in high-duration bond funds into funds with a lower duration and average maturity i.e. short-term bonds.

Source: Economic Times

Thanks and Regards,
Sanchari Sinha,
Intern at DENIP Consultants Pvt. Ltd.