Short-term interest rates have been at historic highs for quite sometime and it's expected that rates may go up soon again to curb ongoing inflation. That may worry investors about the value of their investments. Some financial instruments are very much sensitive to the interest rates.
When it comes to a rising interest rate environment there are several things to consider. Below are few strategies you can adopt during rising interest rates scenario:
- 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 go 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 pushes 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.
- Floating rate funds can be a good option in rising rate scenario. Floating rate funds vary from conventional fixed rate investments mainly on the basis of coupon rate i.e. the coupon is revised at regular intervals with respect to change in the benchmark rate. Consequently, if there is a rise in the interest rate, the coupon rate usually reflects this change, thereby securing the interests of investors during rising interest rates. Some of the floating rate funds available in the market are Birla Sun Life Floating Rate Fund, HDFC Floating Rate Income Fund, Canara Robeco Floating Rate Fund, etc.
- Investing in defensive stocks is also a bull strategy during rising rate scenario. You can buy stocks of the companies that make or sell products that people have to buy no matter what: medicine, for instance, or groceries. Defensive industries such as health care, consumer staples, and agriculture wouldn't affect much during such time in-fact they are dominant players in the market and they usually maintain earnings growth in most economic conditions. So you can buy stocks of such companies.
- Commodities offer real protection and hedge against high inflation and high interest rate environment. That's because when inflation is surging, price of natural resources like oil, food, and raw materials soar too. And, metals like gold and silver are considered to be as safe haven during such times. With a small stake in commodities -- say, 8% to 10% -- you can lower your portfolio's risk regardless of the economy.
It would be appropriate to consult your financial advisor to know more about profitable opportunities from rising interest rates.