As a borrower you may have to shell an cost extra cost for your financial need but nonetheless, rising interest rate scenario can be leverage by you to earn few extra bucks. As it is the interest rate scenario which has for some more than four years remained steady has taken an upward trajectory owing to rising crude oil price and in turn inflationary pressure.
In its second monetary policy review for the FY 2018-19, the benchmark repo rate has been increased for the first time in over 4 years to 6.25%.
How to leverage such an interest rate scenario?
Debt mutual fund investors in view of the rising interest rate scenario can invest in short and ultra-short term debt funds to earn more steady and stable returns. This can be done so, as in the increasing rate regime, price of existing bonds begin to decline in the anticipation that newer debt instruments will be available at a higher costs. Likewise the associated NAV also sees a southward trajectory, the effect is more pervasive in case of instruments with underlying securities having a longer maturity term.
What debt funds to invest in to capitalize on the opportunity thrown open in the higher interest rate regime?
The recent rationalization and categorization call by the SEBI to ease the investors' process of making the right mutual fund investment decision has resulted in evolution of some 16 categories in the debt mutual fund space. And the variation in these is dependent on the maturity span of the underlying securities.
Other investors who do not want their capital to erode can consider investments in liquid and FMP or fixed maturity plans who in case of HNIs or one in the higher tax bracket are more yielding due to the indexation benefit.
Also, in the current regime, avoid instruments with longer maturity timeframe as they can result in capital loss over time as interest rates trend even higher.
But what is important is you need to constantly review rates on G-securities, as upon its rise the risk factor on your investments can rise many times and there can be a threat on the principal amount as well.
On the whole, debt funds are not capable of wealth creation and are suitable for short to medium term investments for retirees who want to earn some regular source of income and can be also be taken position in when one is nearing the investment goal to de-risk his or her investment portfolio.