Where Should You Invest In A Rising Interest Rate Scenario

In its latest monetary policy review on April 8, the Reserve Bank of India (RBI) pivoted from supporting growth to containing inflation.

- Sudipta Mitu

Most experts believe that it is only a matter of time before the RBI begins to hike the repo rate. Debt mutual fund investors need to take cognizance of this shift and avoid being taken by surprise.

In recent times, interest rates within the debt market have been moving upward. The 10-year G-Sec is at around 7.20 per cent (at the time of writing). Several factors are responsible for this. The ongoing war between Russia and Ukraine has led to supply disruptions and caused worldwide increase in prices of crude oil and commodities.

To contain inflation, central banks are hiking rates. The Bank of Canada was the latest to increase its benchmark rate by 50 basis points. The market expects the US Federal Reserve to hike rates as many as six-seven times. In India, too, most experts expect at least a 100-basis-point increase now.

Where should you invest in such a scenario? It is best to stick to shorter-duration funds when interest rates are rising. That is because these funds invest in bonds having shorter maturities. Since the average duration of their portfolios is low, they take lower mark-to-market hit due to rising rates.