How to Benefit from Falling Interest rates

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As the interest rates follow a downward trend, this is the opportune time to invest in bond funds...

There has been a downward interest rate trend and we have seen a 75 basis points cut in the interest rates since the start of the year.

 

The period with highest rates was the most opportune time to invest in gilt or long-term bond funds, which has passed. However, with inflation following a downward trend, there is a general consensus expecting more rate cuts.

 

Therefore, it could be an opportune time to get into gilt funds for an opportunistic fixed income investor. Gilt schemes invest in government securities. They have a long maturity period because of which they are actively traded and every bank is a buyer. This makes them volatile to interest rate changes. When interest rates go down, they benefit the most and vice-versa. So, one can invest in them opportunistically in the falling interest rate scenario but should move out before the interest rate reversal.

The category of Gilt medium and long-term funds has delivered a return of around 14 per cent over the past one-year.

 

If you want to invest in a debt fund for long-term, you should consider investing in dynamic bond funds or flexi debt funds. These funds can invest in all kind of debt instruments with varying maturities, depending on interest rate scenario. Such flexibility helps in uncertain times. These funds adapt themselves to the changing interest rate scenario, thus reducing interest rate risk to some extent. For instance, with current interest rates going down majority of income funds have invested a significant portion of their assets in government securities.

 

Also, SIPs suit equity investing as they negate the market risk. But with current state, you want to make the best of available rates, so you can make a lump sum investment.

Happy Investing!!

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