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How To Invest During Rising Interest Rates?

In the current scenario, inflation has increased globally and become a bottleneck for policymakers dealing with rising prices and potential slowdown in economic growth. Keeping the situation under consideration, the RBI last increased the repo rate by 50 bps to 5.9% in Sep 2022, making loans more expensive than before.

The central banks worldwide, including the Reserve Bank of India (RBI), work on the mission to keep their country’s economies hum just right. They keep a check that the economic conditions are not too hot and lead to inflation going out of hand to threaten economic stability. In such situations, Central Banks increase the interest rates to tame inflation.

While this move is deemed to ensure economic stability, how does it affect mutual fund schemes? Do you know where to invest when interest rates rise? Let us help you understand how to make informed decisions in such situations.

What About the Supply of Money When the Interest Rates Rise?

A part of investing in rising interest rates is knowing their impact on the supply of money in the country’s economy. If you know less about this side of the market, read this -

When the interest rates increase, it leads to an increase in the borrowing cost, which makes loans expensive. Eventually, when the borrowing power decreases, so does the money supply. On the other side of a low inflationary situation, the interest rate reduces, making borrowing cheaper and a consecutive rise in the money supply. This also means people will have more money to spend or invest.

If you can connect the hidden dots here, you will realise that individuals may find it easier to invest money in mutual funds or other instruments when the interest rates are low. However, this does not imply you cannot make mutual fund investments otherwise.

Knowing how the rising interest rates affect different kinds of mutual funds is the key here.

Impact of High-Interest Rates on Debt Instruments

As you might know, increasing interest rates affect almost every kind of debt instrument. Bond prices are inversely proportional to the interest rates, which means the price of bonds will fall when the rate of interest soars. On a granular level, medium to long-term debt investments face a severe impact, while the price fluctuations are low for short-term instruments.

Hence, selecting debt instruments that invest for a short period may be suitable for you while investing in rising interest rates. You should also know that long-term and medium debt instruments can witness a price correction during uncertain times.

Impact of High-Interest Rates on Equity Instruments

Let’s roll back your lenses to how the economy works as a chapter in the book on investing during rising interest rates.

When the interest rate rises, banks have no other option but to increase the rate at which they offer loans. On the business side, the rise in lending rate further increases the cost of capital for organisations, which in turn impacts the companies’ financials. The reduced returns may impact equities or equity instruments.

How to Invest During Rising Interest Rates: Key Tips

1. Continue with your SIPs

When your SIP-based mutual fund investments are linked with specific long-term financial goals, it makes sense to continue with your SIPs. Maintain diversification in your portfolio and let the high tides settle before you make any decision in a hurry.

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2. Invest in short-duration funds

If you want to get the hang of investing in rising interest rates, you can proceed with including short-term debt funds. As mentioned above, the impact of interest rate hikes is lower on these funds. Similarly, you can go for liquid funds or ultra-short-term mutual funds.

3. Hold your horses running for more borrowings

Since rising interest rates increase the cost of debt, it may not be a good idea to proceed with borrowing more loans during such periods. Instead, focus on paying your debt and controlling your income.

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Disclaimer:
Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/investoreducation/what-to-know-when-investing This is an investor education and awareness initiative by Nippon India Mutual Fund.

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document. Language Disclaimer:
While utmost care has been taken in translating the article into respective regional language(s), in case of any confusion or difference of opinion, article available in English language should be deemed as final. The article provided herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional advice for the readers. The document has been prepared on the basis of publicly available data/ information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of loss of profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this article. "ABOVE ILLUSTRATIONS ARE ONLY FOR UNDERSTANDING, IT IS NOT DIRECTLY OR INDIRECTLY RELATED TO THE PERFORMANCE OF ANY SCHEME OF NIMF. THE VIEWS EXPRESSED HEREIN CONSTITUTE ONLY THE OPINIONS AND DO NOT CONSTITUTE ANY GUIDELINES OR RECOMMENDATION ON ANY COURSE OF ACTION TO BE FOLLOWED BY THE READER. THIS INFORMATION IS MEANT FOR GENERAL READING PURPOSES ONLY AND IS NOT MEANT TO SERVE AS A PROFESSIONAL GUIDE FOR THE READERS."

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