Which instrument can give better returns in high interest rate scenario?


There is so much going around in the markets. Somewhere in some parts of the world, someone is talking about recession, while in some other part someone is talking about high inflation numbers.  Equities are volatile and our dear investors are totally confused on what steps need to be taken ahead! 

Well one aspect of macro economics that seemed to be materializing is the rising interest rates. You talk about the Fed in the US or RBI in India, most of the central banks globally are raising interest rates in their respective domestic economy, just to combat inflation. 

Our dear investor is observing all such news, but is still confused about what to do in the current rising interest rate scenario? 

The Solution

Well ideally in such a scenario, an investor should know that as the central bank increases its interest rate, all the other rates in the economy – be it interest on savings bank account, fixed deposits, Treasury bills etc. increases. But how can you benefit from it? 

Well indian corporates as well as government always are in constant need of funds to carry out their development activities and business operations. They of course can’t issue equity each and every time they need money. So what do they do? They rather try to fund their operations by issuing debt instruments. 

Eg: So let’s say if Reliance wants rs 500 crores to fund its business operation, it can simply tap the capital market route and issue debt papers that carry a fixed rate of returns. And the good part? These returns are usually higher than the savings bank account or fixed deposits rates offered by the bank. And in the rising interest rate scenario, returns can be attractive 🙂

But again the next problem comes is, that the value of each single debt paper can vary widely among corporations and governments, and an investment in a single paper may require Rs 10 lakhs or even higher!! What to do now in such a scenario? If as a retail investor, you have say rs 1,000 to invest, how can you invest in these papers then? 🙁

Investment Instrument

Well not to worry now, you can simply invest via debt mutual funds route 😀

These are the mutual funds that invest in the wide variety of debt instruments issued by various corporate entities as well as the Government of India. 

Eg: if you will have a look at the portfolio of Aditya Birla Sun Life short term fund, which is one of the debt mutual funds, it looks something like this:

You will see that the fund invests in debt instruments of Bajaj group, HDFC, Government security along with 116 other companies as mentioned in the last row. 

You can also have a look at the below diagram, to get the understanding of basic functioning of a mutual fund: 

Therefore, the debt mutual fund route gives you the opportunity to invest in the high interest bearing debt securities being issued in the rising interest rate scenario.

But let us tell you, picking a debt fund is not an easy task, and a single mistake can cost an investor his valuable savings. 

But don’t worry, in the next article of this series, we will provide you with a ready checklist on how to pick your debt mutual fund. 

So see you there 🙂

Also before leaving, if you want to get help on how much of your portfolio value needs to be invested in debt, you can refer to this already published article on “How much debt should you allocate in your portfolio?

Until then!

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