How to invest in market during rising interest rates
Nowadays, people have realised that they need more than one source for earning income. The pandemic just made the people feel the limitation of income from full-time employment. That’s where investment planning comes in. The act of investment involves ascertaining how many parts of the investor’s income should be dedicated to savings and how much for personal expenditures. One of the ways that one can not only save money but also accumulate wealth over time is by investing in the market.
Investment plans are the type of investment tools that help you to earn income more than what you invested. But, sometimes, the market might experience a rise in interest rates. There are numerous strategies that you can follow if you have invested in a fixed income instrument. Listed below are a few of them:
- Investing in bonds with short-term:
If the rate of interest is trending higher for long-term investments, then shortening your investment portfolio’s duration may alleviate the risk of the rate of interest. As the bond prices have an inverse relation with the rate of interest, bonds for the long term are exposed to the risk of a substantial downfall in value because of increasing rates of interest. Investing in short-term bonds can be helpful in many ways. Though they are known for offering a comparatively lower rate of interest than long-term bonds, short-term bonds are less risky for holding until maturity. That’s because they are less sensitive to severe rate drops in prices and hence, they are easier to sell even when the rate of interest rises.
- Invest in bond ladders:
Through a bond ladder, you are purchasing bonds with different maturities and the range of this ladder depends on the time horizon of your investment. The span of a shorter ladder ranges from 1 to 7 years and longer ones can go up to 30 years. To maintain this ladder, you need to re-invest maturing bonds into new bonds that have maturities for maintaining the target balance. This approach may help to alleviate the risk that is inherited to purchase the bonds when the rates of interest are rising. Investing in short-term and medium-term bonds with varied maturities enables an investor to maintain better control on exposure to the risk of the rate of interest. Re-investment of the proceeds from the matured bonds into the newly matured bonds provides an opportunity for the investors to take the benefits of the rising rate of interest. Bond ladders also provide a predictable flow of cash. While bond ladders need considerable capital, they are also a great method to mitigate the rate of interest.
- Investing in floating rate bonds:
These bonds are also referred to as floaters. They come with a variable interest rate which is known to reset at regular intervals. When the bond’s yield fluctuates with the change in the reference rate of interest, the spread generally remains the same. The yield can be reset weekly, daily, monthly, or after every three, six, and 12 months. Floaters can remove the risk related to the rate of interest and hence they perform better than the traditional fixed-income investments as the rates of interest increase. The downside of this investment is that its investors will risk lower yields when the rate of interest goes down.
- Purchasing or investing in real estate:
The price of real estate tends to rise with and sometimes even outmatches the rates of interest. Purchasing real estate or investing in it is another method to realise profits when the interest rates are rising.
- Selling your assets:
You can opt to sell your unrequired property or some other assets. By doing this you may get to enjoy profit from selling these assets before the rates of interest begin to rise. The buyers may be looking to buy assets at a time when they can lock in for the long-term and even at low rates. So, they can be willing to pay the premiums for acquiring the required assets before the rates begin to go up.
Investing when the interest rates are rising can easily be done by allocating funds to real estate or even selling your assets. Investing in floating and short-term binds is another option of good investment when the rates are rising. If you are having doubts, you can get in touch with an advisor for financial advice.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.