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Cash in on rising rates

The recent moves in the debt market show that rates are rising, as there is action to clamp down on inflation. Investors looking at the debt side of their portfolio have several options. Arnav Pandya tells.

india Updated: Jun 19, 2008 23:52 IST

The recent moves in the debt market show that rates are rising, as there is action to clamp down on inflation. Investors looking at the debt side of their portfolio have several options available. The time when they decide to exercise an option, along with the manner in which they act, will determine how well they can handle the situation. In such a scenario, investors need to be alert to make the most of rising rates in the economy.

Wait for the rates to rise

In case of fixed deposits, the rate applicable at the time of making the deposit is the rate that the investor will earn over the life of the investment. It is necessary that an investor is able to get the best rates on the deposits that they are making and this can be done by looking at the current position in the market. When rate hikes are expected, it is better to wait for some time and then make a deposit. Even while making the deposit, an investor should check that the institution with which the investment is being made has increased rates so that he can earn higher amounts.

Select the right time period

There can be some strange position in the market when there is a change in the rates. During specific time periods, the bank might require money and could be offering a higher rate for the investor. Tracking this movement will help investors to select this time period and earn a higher rate of return rather than at a period where the rate is slightly lower. Spotting such opportunities is crucial for investors to be successful in their efforts. This can prove to be an added benefit for investors and they should always be on the lookout for such opportunities.

Avoid traded instruments

When there is a rise in the rates, the market prices of bonds and other debt securities decline. Due to this reason any investor who holds these securities will find that their investment value is reducing.

In such a position, when the rates are expected to rise, investors should avoid investment like long-term income scheme and gilt schemes where the impact will be directly reflected in their portfolio value. At such times it is better to be present in areas like fixed maturity plans or short-term plans where the risk is lesser.