X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Interest rates: Which side of fence are you? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Aug 13, 2004

    Interest rates: Which side of fence are you?

    This Tuesday it finally happened. After much dithering, Fed, the US central bank raised the short-term interest rates by one quarter of percentage points for the second time in recent months and hinted that more such steady hikes lay in the months ahead. With economic growth slowing down and job market yet to get fully on its feet, the hike would not have gone well with a section of people. However, the move was aimed largely towards locking the door before the horse of inflation gets bolted. Indeed, rising crude prices have forced consumers to curb spending and has generated inflation led fears.

    The scenario is no different back home as rise in commodity prices and those of some food items have already taken inflation to 7.5%, a level good enough to infuse some fear. With hike in crude prices yet to be factored in, the level might rise even further in the coming weeks. While, the Reserve Bank of India (RBI) might not have hiked rates just as yet, but the possibility of them doing so is getting stronger by the day. Against this backdrop, we had conducted a poll on our website asking people the following question: ' Have you factored in a hike in interest rates in your investment plan?'

    Of the total number of people that polled, 46% said that they have indeed factored in a hike in interest rates in their investment plans while 51% had not done so. 3% had no idea about the same.

    Although there are a myriad of investment avenues to choose from, investments could broadly be classified as Debt and Equity investments. Given the dynamics involved, the two are believed to move not in perfect lockstep with each other. On the contrary, historical evidence suggests that there exists inverse relationship between the two. Thus, during a given period while equity investments will lead to higher returns, debt investments might take over after a certain amount of time. Hence, in order to generate superior returns over time, it is important to a keep a check on one's investments and move them accordingly from one portfolio to another. It should be remembered that given the increased integration of the country with the global economy, it has become increasingly difficult to predict changes in the financial markets. It therefore becomes necessary to monitor ones investments frequently and make the necessary allocation. But the question that arises is 'How should one decide which investment avenue is better at the current juncture?'

    Although there is no hard and fast rule, in an era of low interest rates, equity investments might well turn out to be the destination of choice for many investors. This is because the low interest rate regime impacts the corporate sector positively in two different ways. Low interest rates enable and entice the consumers into buying more thus leading to a rise in demand. Moreover, it reduces the borrowing cost for corporates and thus helps them in achieving break even faster and also in reducing financial expenses for working capital needs. In short, it is a win-win situation for corporates as it gives a fillip to their earnings and valuations in general. Attractive valuations then result in overall buoyancy in the stock markets. However, this process cannot go on indefinitely as resources such as capital (money and plant and equipment) are only limited in the short run and once a crunch is created, prices of goods might climb leading to excess inflation. Hence in order to curb spending, a hike in interest rates becomes necessary.

    No sooner does interest rates begin to rise, bond prices start falling as people start demanding bonds offering high rate of returns in lieu of the current low interest rate bonds. Therefore, in view of the safety that some debt securities offer and also increased volatility of equity markets, some people consider it an opportune time to make investments that are inclined more towards debt markets. Also, the equity markets have to witness certain erosion in prices so as to maintain the relative attractiveness of the equity markets vis-a-vis its debt counterparts. Thus as we have seen, although there is no such thing as 'the' best strategy, adequate diversification can go a long way in shielding you from the market vagaries.

     

     

    Equitymaster requests your view! Post a comment on "Interest rates: Which side of fence are you?". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process) (The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    Which Gods Will Bring Down the US Empire? (Vivek Kaul's Diary)

    Aug 17, 2017

    Mr Trump is in the White House and the gods are in their heavens; what's not to like?

    Will They Haul Off Trump's Statue, Too? (Vivek Kaul's Diary)

    Aug 16, 2017

    All across the country, the old gods become devils. New, gluten-free gods take their places...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 17, 2017 (Close)

    MARKET STATS