The rise in the interest rates is impacting every borrower. And even investors have not been spared because a sustained high interest rate implies that they will have to earn higher rate of return to keep their real rate of return in positive.
Add to the high interest rate, high rate of inflation and the cocktail becomes really heady. This is because the overall expenditure rises, leading to imbalances in the household budget.
So such situations, where the rise in expenses coupled with fall in returns are rather challenging for investors. During such times, it is important that investors are able to ensure that they keep earning good returns, even after things cool down a bit to make up for the money they lost in bad times.
Generally, it is believed that investors stand to gain in a rising inflation scenario because there is a rise in the rate of return. But these gains do not last for the long-term as any correction in the inflation is quickly followed by the drop in returns.
The real benefit for investors will only happen, if they are able to maintain this higher rate of return over a longer period of time. Here are a couple of ways to retain the higher rate of return over time.
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Long-term deposits: There are several fixed deposit options available with banks that range from a period of less than a year to over five years. One of the first things that the investor should do when they spot a very high interest rate income that does not look sustainable over the long term is to lock themselves in for a longer time period.
This means that the investor will have to select a fixed deposit scheme that offers a guaranteed high rate of return over a long time. This helps them to insulate themselves from market realities, even when there is a fall in the interest rate.
However, one needs to be a bit more careful on this and make a clear distinction between bank deposits vis-a-vis other bonds or debentures. This is because most of the bonds and debentures issued by private players have an option whereby they can be redeemed earlier.
So, if the interest rates were to fall, they have the option to call back the bonds leaving the investor high and dry. Banks, on the other hand, do not know such an option. Yes, there is a degree of risk as well when interest rates shoot up abnormally and continue to stay there for a long time.
Recurring deposits: The single biggest problem with high interest deposits is that the investor needs to have adequate sum of money to take advantage of the situation. To avoid this, there are recurring deposits options that allow you to invest a regular sum each month. The good point about them is that the interest rate on the recurring deposit will be the ratethat was application when the deposit was started.
As a result, if you enter it at a higher rate of interest, you will be able to garner better returns even when the rates are falling. But remember to fix the period of the investment in such a manner that it stretches over a long time period (again 7 to 8 years). In this manner, the returns will be substantially higher over a longer period of time.