When interest rates rise, follow these 4 strategies

In response of rate hike by RBI to manage inflation, banks increase their interest rates offered on their deposits on one end & their loan products on other end. You may choose to employ following strategies to manage your funds, finances and investments when interest rates are on upward trajectory:

A. Prepay existing loans

If there is a steep increase in rates by your bank, it makes sense to prepay and/or foreclose that home or car loan. Incase you don’t have the money required, it is advisable to prepay atleast that portion that can easily be prepaid without any prepayment penalty charges. Check with your bank for charges.

B. Reconsider Post Office saving schemes, Bank FDs

Saving schemes by India Post are backed by the government, they allow tax deductions under Section 80C and generate good post-tax returns incase of inflationary interest rate environment. You may want to consider a small investment in NSC, PPF account or even book a bank FD for around 12-18 months to lock in a high interest rate.

C. Exit corporate debt instruments, deposits with low credit rating

During the periods of rising interest rates, corporates have to service their own debt at higher rates which makes them extremely vulnerable to servicing the interest & principal commitments on their FDs, bonds to investors. Become cautious when you read about inflationary trends, rising interest rates over continued period of 3-4 quarters. You would do well to focus on other investment alternatives at this time.

D. Shift to liquid, short-term debt funds from long-term debt funds

Interest rates have inverse relationship with bond returns. Picking up short maturity debt funds ensure good returns without the volatility experienced by long duration funds during rising interest rate environment.  «GM»