In this post, we will look at Investment options that should be used when interest rates are falling.
25 Year Trend in Interest rates
Recently, on 22 May 2020, RBI announced a decrease in Repo Rate and Reverse Repo rates by 40 basis points. Due to this movement Interest rates in India stands at 4%.
Now, a lot of Investors are worried about limited investment opportunities.
But in this present scenario, there are certain instruments that have given good returns in spite of falling interest rates.
Investing When Interest Rates are Falling
Gold & Silver
Gold is considered a safe haven and mostly outperform interest rates offered by bank deposits when interest rates tend to fall.
Gilt Funds
Gilt funds are mutual funds that invest in government securities such as bonds. The maturity period of these securities is very high (5 to 30 years). Returns delivered by gilt funds are generally consistent over large time such as 10 years or more.
And in the short term (1 to 3 years) they tend to outperform interest rates and sometimes equity indices also.
But Investors need to very cautious while investing in Gilt funds for short duration like less than 5-8Years. Returns offered by gilt funds are linked with interest rates offered by banks. When interest rates offered by banks tend to increase over time, Gilt funds tend to underperform bank deposits.
Some Examples of Gilt Funds are
Lets us take an example of a Gilt fund
Here is portfolio of this fund.
Therefore, capital allocation is very important while investing. Investing within equities might be fruitful for the short term but over a longer duration, proper asset allocation can help us maximize our wealth.
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