How To Invest During Rising Interest Rates

Many investors reduce their investments when interest rates rise. That's because they fear lower stock prices will impact their returns during this period. And this is why they lose out on earning better returns from their investments.

Truth is - you do not need to put your investments on hold when interest rates rise. All you need to do is readjust your portfolios to get returns. Not sure how to navigate investing in this scenario? Worry not. This blog helps you with just that.

5 Ways to invest during rising interest rates

1. Invest in cash-rich companies

A cash-rich company can easily tide over periods when the interest rate is higher. This is because they aren’t dependent on banks to lend them money and have sufficient cash flow. Moreover, they earn more on their cash reserves even during high interest rates. This means their stock prices are less likely to fall, getting you better returns.

Invest in companies having a large percentage of book value as cash or companies with a low debt-to-equity ratio. This way, you’re more likely to get fair investment returns.

2. Embrace short-term or floating rate bonds

Bond prices are inversely linked to interest rates. So, when interest rates rise, bond prices typically fall. Remember that bonds with different terms are available in the market. So, if the market correction is quick, bond prices will also shift.

Therefore investors benefit most when investing in short-term or floating-rate bonds rather than long-term ones.

Besides, investing in short-term bonds or floating-rate bonds also diversifies an investor’s portfolio, reducing investment risks.

3. Inflation hedge

Interest rates increase during inflation, thereby lowering returns. Therefore investors must edge against inflation through suitable investments.

If you have SIPs in your investment portfolio, continue with them. Invest in debt funds with a short maturity period, given these tend to do better during interest rate hikes. Ultra-short duration funds or low-duration funds, CFD (Contract For Differences) and short-term Gilt funds are excellent investment options for this period.

Are bonds good investments when interest rates rise?

Yes, bonds are good investments when interest rates rise. But investing in short-term bonds is better than investing in long-term bonds.

Keep in mind that the bond's value goes down when interest rates go up. Now, long-term bonds have a longer holding period. So, if the interest rate changes during the holding period, the effect of the new interest rate will last till the end of the term. This will impact your returns significantly. On the other hand, short-term bonds have a shorter holding period. So, even if the effects of the interest rate last till the end of the term, the returns are not affected as much.

Do High-Interest Rates Attract Investments?

Rising interest rates boost the demand and value of foreign currency. Therefore high interest rates draw in foreign investors.

Key takeaways

• Adjust your investment portfolio to get good returns even when interest rates rise
• Invest in cash rich companies, short-term and floating rate bonds, and build an inflation hedge with short-term and ultra-short duration funds
• Remember that high interest rates will boost the value and demand for foreign currency, attracting foreign investors

Now that you know how to invest during high interest rates, you must choose the right investment avenue. Visit the Moneyfy website  or the Moneyfy App to compare different investment avenues or learn how to hedge against inflation.