Why Should You Invest In Fixed-Income Instruments During High-Interest Rates

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May 12, 2024
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    Fixed-income instruments are considered one of the most secure and constant sources of investment. In fact, you would be surprised to know that the investment-grade corporate bonds from leading NBFCs of India offer 11-13% fixed returns. This is also why a fixed-income instrument is considered a package deal of consistency and profitability.

    While consistent, fixed returns are great for all seasons, certain market timings can make it more attractive to invest in fixed-income products. These attractive windows are when there are periods of higher interest rates as we are currently witnessing in 2024. One of the most common reasons behind unawareness about these timings is the lack of understanding about the relationship between fixed-income instruments and interest rates.

    Therefore, this blog will cover in detail how and why to invest in fixed-income instruments during high-interest rates.

    Understanding The Relation Between Interest Rates And Fixed-Income Investments

    A fixed-income investment like FDs, corporate bonds or SDIs, is about lending your money to a company with the promise that it will repay the investment along with interest. Just like any other form of investment, the value of fixed-income investment is subject to various market factors. Interest rates, company performance, asset values, etc., are some of the factors on which the profitability of fixed-income investments depends.

    The Reserve Bank of India is responsible for stabilising the national economy and maintaining price stability through turbulent periods. Thus, it often increases interest rates in response to inflation pressures due to the country’s economic expansion. Similarly, it reduces interest rates in times of recession.

    When interest rates go up for banks, individuals' and customers' borrowing costs increase. This means that you should borrow during a period when the RBI has decided to cut down its interest rates.

    If loan interest rates are going up, it means the interest you earn from lending money will also increase. So, if you are investing in bonds when loan costs are high, you will make more profit from your investments.

    How To Invest Wisely When Interest Rates Rise

    When investing in bonds, some simple measures can help in drastically reducing the risk associated with them. Read the following tips to safeguard your investments from losses as much as possible.

    1. Invest In Floating-Rate Funds

    A floating rate fund is a debt mutual fund that invests in fixed-income securities with varying or floating interest rates. The returns on these instruments are tied to a benchmark rate. As interest rates rise, so do the profits on these assets. This makes them an effective way to beat interest rate risk. 

    Suppose you buy RBI floating-rate funds with an NSC spread adding 0.35%. So, if the NSC rate is 7%, you will get a profit of 7.35%. Thus, giving more than what you initially expected.

    2. Understand The Interest Rate Environment

    When you are investing in bonds, you must stay informed about interest rates and keep track of the dates of RBI’s monetary policy meetings. By doing this, you can know how RBI views the prevailing interest rate environment as well as the economy generally. This will help you in choosing the right fixed-income securities for investment.

    For example, in FY25, the RBI is likely to keep the policy rates steady at 6.5%. Thus, considering the current scenario, there would be no notable changes in the interest rates. So, by being aware of such interest rate facts, you can plan your investments wisely.

    3. Monitor And Rebalance

    If you plan on investing in bonds or any other fixed-income instruments, you need to understand that changes in interest rates may affect the portfolio allocation. Thus, rebalancing can enable you to ensure that your investments match your risk tolerance and investment objectives.

    Suppose your target allocation is 60% stocks, 30% bonds, and 10% gold. After a few months, due to the rise of interest rates, the profitability of bonds increased. Now, this will require changes in the asset allocation as well. Thus, monitoring such cases can allow you to thoroughly reallocate your resources in order to ensure the most out of your funds.

    4. Use Bond Ladders

    The bond ladder is among the most popular strategies that financial planners and investment advisers often suggest to clients interested in investing in bonds. It involves a sequence of bonds having maturity dates at regular intervals like every 3, 6, 9, or even 12 months.

    If you start investing in bonds with maturities ranging from one to five years, as each bond matures, you reinvest the proceeds into new bonds with longer maturities. This allows investors to continually capture higher interest rates as they reinvest while also providing regular income from maturing bonds.


    Periods of high-interest rates present opportunities for investors to invest in fixed-income instruments. However, it is crucial to understand the relationship between fixed-income investments and interest rates to make informed decisions when investing in bonds. 

    Staying updated, taking a long-term approach, and avoiding sudden investment decisions are essential steps every investor must take to ensure a safe and profitable investment journey. Following these guidelines will give you a buffer against changing conditions set by fluctuating interest rates that come with time. So, make use of this advice and take control of your financial future by investing smartly.

    If you are planning to invest in fixed-income instruments, consider visiting Grip Invest! It is a trusted, investor-oriented platform that offers numerous alternative investment opportunities spread over a large risk-return spectrum. Go ahead and start your investment journey today with Grip!

    Frequently Asked Questions On Fixed-Income Investing During High Interest Rates

    1. Is it good to invest in bonds when interest rates are high?

    Yes, it is beneficial to buy bonds during periods of high-interest rates owing to their greater returns. To capitalise on such situations, you can consider floating-rate and short-duration debt funds. Furthermore, the prevailing market interest rates may push up the cost of borrowing, thus also pushing up interest on debt funds.

    2. What is the best investment when interest rates are rising?

    There are various investment options you can choose from when interest rates rise. Some of them are floating-rate funds, money market debt funds, fixed maturity plans, etc. However, you must read about their pros and cons before investing.

    3. How do high-interest rates affect debt financing?

    The rise in interest expense increases capital costs for borrowers. Earlier instruments like older debentures may become worthless. However, new fund offers might generate more returns and attract more investors. The value of outstanding securities declines while the rate of existing debentures falls off. 

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    Disclaimer - Investments in debt securities/municipal debt securities/securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully. The investor is requested to take into consideration all the risk factors before the commencement of trading.
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