When RBI recently cut repo rates by 25 basis points, it was one more indication that we are in a downward-spiralling interest rate regime. Shortly after RBI made its announcement, most banks reduced their interest rates, and the rest may follow sooner or later. In fact, the interest rate has been on a downward swing the last few years, falling from 9% a few years back to around 4% today, leaving investors in a lurch. In this low-interest regime, what do you, a young working professional, do? Here is our expert’s advice on 5 ways you can minimise the impact of lower interest rates on your life.
Lower interest rates are a boon for those of you waiting to buy a house or a dream car.
Since the interest rates are lower, your EMIs will be lower. So, go ahead, buy that ideal
home or the dream car. Or even buy that huge TV you have been eyeing since long but
didn’t have the courage to buy. Do remember to cap your spending though. Except for that
house, nothing else is an asset; they are all liabilities, no matter how low the interest rates
If you want to increase your money however, not deplete it, read on for investment tips.
Liquid is Solid Now
If you have been following in the footsteps of your parents or elders and investing in the
traditional saving instruments, think Liquid. Liquid funds seek to earn more returns than the
traditional investment options, with the additional flexibility of the money being available to
you whenever you need. You may invest a part of your income in liquid funds and redeem it
whenever you need it. Additionally, most fund houses provide the facility of investing and
redeeming a liquid fund through a smart phone-based app. One such example is Aditya Birla
Sun Life Mutual Fund’s Active Account app. You can invest instantaneously through fund
transfer from your bank. You may also redeem and get the money back in your
account immediately. All this, at a reasonable return than that of a regular saving
instrument! You may opt for this option if you want to park your money for 0-3 months.
Debt is Good
Debt funds could be considered by those of you who want reasonable returns without
taking a huge risk. Though they are a good option for risk averse investors at all times, in the
current regime, debt funds could be considered by everyone who wants to invest in
the short-medium term (3-12 months).They are safer than pure equity investments and
seek to give higher returns than liquid funds. The best part is you can choose a fund based
on your own risk appetite. So you may invest a part of your savings in debt, and cash it in
anytime you need.
Investing in equities directly through the stock market needs a lot of research and you need
to be on your toes all the time. If you wish to invest in equities but are too busy to spare the
time to follow through, then equity mutual funds are a good option. In a lower interest rate
regime, you may invest in equity funds through Systematic Investment Plans (SIPs). Since
you will be investing every month, you may benefit from the averaging out of NAVs. If you
are a new investor & have a good risk appetite; then you may consider investing large-cap
or balanced funds.
The Name is Bond
For those who wish to leave the job of taking call on movement of interest rates to the
experts opt for dynamic bond fund. Dynamic bond funds invest across instruments of
various maturities- long term, short term or a mix of both, based on the interest rate
movement in the economy. It’s suggested that you match your investment horizon with the
fund’s average maturity to seek better returns. Opt for dynamic bond funds that have a
proven track record over the years.
As interest rates fall, you will have to rethink your financial goals and analyse your own risk
appetite. Putting in a part of your fund in short-medium term investments is a good way of
ensuring your money keeps earning for you. Research well and design a balanced portfolio
that is a good mix of long-term and short-term strategies. If you have not looked at mutual
funds in the past, now is the time!
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.