Where to invest in declining interest rate regime?

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Published: Thursday, May 17, 2012, 10:41 [IST]
 
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Where to invest in declining interest rate regime?

The recent policy rate cut by RBI rejuvenated the slowing down of economic activities after series of global financial recession. The policy rate has been slashed by 50 basis points during recently concluded economic policy revision by RBI. Banks and financial institutions have started cutting down the base rates which are linked to the loan and deposit interest rates.

After the rate reduction, IDBI bank has already reduced the base rate by 25 basis points. For banks and other financial institutions the rate cut would make less impact on the margins, since an interest rate would be revised for deposit and lending both the products. Most of the Banks have already cut down their interest rates on Deposits but still some other options are there in the market which may provide better returns.
The investors have to make a right balance in his portfolio.

The portfolio should be so designed that the effect of interest rate downtrend and economic volatility remains minimum. With fall in bank’s interest rate, other financial products are expected to follow the trend and come up with a rate correction in coming days. In such situation, investors have to look after safe harbor to invest the fund.

Let us see some of the attractive investment options available in the current market for retail investors: 

Public Provident Fund (PPF)
The Government has elevated the interest rate on PPF to 8.8% recently. The change in an interest rate of PPF is not very common. Government keeps an eye on the rates and makes alterations only on the heavy changes in rates by the RBI. This stable nature of the fund makes it popular among the common investors. So, this is one of the good options to invest in. 

National Saving Certificates (NSC)
The recent changes in Post Office Savings Scheme have been very attractive for investors. NSC is a scheme for investors of medium term say 5 to 10 years. The change in interest has also been made in NSC, i.e. 8.6 % for five years and 8.9% for Ten years. This is another good option for investors in current economic scenario. 

Investment in Bonds through Mutual Funds
The normal investor, who doesn’t have so much knowledge of the market and its products, wants simplified investment plans. Investment in Bonds is not an easy job to handle as the price of bond is negatively correlated to the interest rate. When an interest rate is hiked, the price of Bond falls and vice versa. So the investor cannot track such a process every time. The best option to invest in bonds is through Mutual fund. Investing through Mutual Fund ensures risk handling and better return. So this is a good option to invest. 

Real Estate
It is the hottest investment area these days. When the interest rate falls, the Real Estate Developers and Builders gets relief as they can get the fund at cheaper cost. The construction works gets faster, and the property is sold quickly as the purchaser also gets Bank Loans at lower rates. So, the rate cut generates liquidity in the market which in turn creates an option for the investors to invest their fund and get better return.

Bullion Market and Exchange Traded Fund (ETF)
This has shown tremendous growth continuously from many years. The volume of trade in bullion market has grown by many folds in last few years. If the investment is done with proper care and planning, the returns can be very higher. Though risk associated with it is low but proper care is always required for timing the investment and to earn higher return. Investment in bullions can be made by Demat (e.g. NSEL) also and profit can be booked time to time during volatile movements. 

The Government is removing a subsidy from petroleum products which in turn will bring up the inflation rate. In such situation, the best commodity to invest in is Gold. Investment in Gold can be done by physical purchase, ETF, or Commodity market. Whatever may be the mode of purchase, Gold provides proper hedge against growing inflation and becomes good opportunity for investment. With the falling interest rate, the prices of Gold ensure better security to the invested funds. 

Investor should select investment plans as per his choice. The return is always associated with risk and the investor himself is the best judge to decide what his preferences are, risk bearing capacity and time period for investment. Taking all this points into consideration, he can opt for the best investment plan. 

InvestmentYogi.com

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