When interest rates rise8230;

Depending on your banks base rate,your rate will float too and if youre expecting rates to start trending upwards,its important to look at those opportunities, said Vishal Dhawan,certified financial planner whos been co-director at Planning Ahead Wealth Advisors for the last seven years. He mentions a floating rate deposit product offered by State Bank of India and a floating interest plan from HDFC Ltd,as particularly viable products. As rates go up,your investment may move in your favor but if they do go down,it will count against you, he said.

To protect against any sudden fluctuations,Lakshmi Iyer,head fixed income and products Kotak Mahindra Asset Management Co. Ltd,strongly advises investors from straying into the equities market,as fixed income investments at least ensure the safety of the investment capital. In fixed income youre safe unless there is a credit default which cannot be said of an equity investment, she said. The reason is that the coupon keeps increasing and will off-set any drops in interest rate at a faster pace.

The most likely product to provide returns during the suggested one-year investment period is a fixed-maturity plan offered by mutual funds which thrives on the rising rate scenario,says Iyer. When you have this type of scenario when rates are likely to inch forward,then its time to buy into assets and lock into a fixed maturity plan,irrespective of the rate,she said. The client that has invested makes money on the maturity anywhere from three months to a one-year tenure.

As compared to Dhawans option,Iyers advice to lock down a rate now would almost guarantee some type of return over the one-year span,but without the upside of increasing margins if rates continue to climb. Dhawans direction would certainly require more detailed inspection of market conditions and product rates along with a willingness to pull-the-trigger and swap products. Depending on liquidity and affinity for risks,both options could result in more than marginal returns while rates rise during the rest of the fiscal,and likely beyond.

What should be avoided are long-term bonds where the rate is limited and the flexibility almost nil. The upward market fluctuations will likely pass investors by,long before they can even think about options for even buying out of the investment,a practice which in itself would be frowned upon by most wealth managers and financial planners. Long-term bond rates can have a downward impact,the short-term bonds leave investors less exposed because the average maturity is only a couple of years, explained Dhawan,again playing to the idea of remaining as flexible as possible. Because you expect rates to move up,you dont want to long into instruments with a long tenure; you want to be able to re-evaluate your proceeds every few months.

Our sense is that you are pretty much at the beginning of the rate heightening,with the RBI adjusting its monetary policy four times in the last six months, he added. Its still very early days because the rest of the world has not started rising rates and is still getting back on its feet,so were believing that it will be sometime before they peak out.

Experts are not shying away from predicting further tightening over the next year,perhaps on more than one or two occasions.

Although rates may still be on the upswing,Dhawan isnt ruling out the viability of certain sectors in the equities market. Instead,he points to real estate markets and automobile companies as investments to stay away from while burgeoning rates remain volatile. We continue to believe that there will be equities that will benefit from the higher rates and equities that spurn benefits from higher rates, he said. But in sectors where leverage is low,its not going to have as much of a negative impact,so besides those interest rate sensitive sectors,you may reap significant benefits if youre willing to take the risk.

But along with most of these products which sell you on flexibility is the price you pay for it. To be sure investment swaps are the right move looking ahead,even if the time-table is just a few short months,CS Jain,head of personal banking and IDBI Bank,is urging investors to seek consultation from an expert before taking high risk decisions. If you are getting 6 per cent on deposits and youre offered a renewal at 9 per cent,theres going to be a cost associated, Jain said. You have to sit down and balance the costs versus your projected profits before determining if the maneuver will be gainful.

The price of gold also tends to rise along with interest rates and could turn out to be a clever investment. Gold has been trading at an all-time high on the Multi Commodity Exchange MCX at Rs 19,066 per 10 grams,after hitting a high of Rs 19,075 earlier,down just .6 percent from an all-time high of Rs 19,198 struck in early June. Although prices may level off in September,festival season stretching through November will likely result in a jolt to the yellow metal,according to traders.

So,depending on an investors liquidity,margin for risk and appetite for activity,options in fixed-income are certainly available while commodity trading and even some equities could produce impressive returns. Based on these variables,an interested investor can make the most out of a sticky situation which promises not to dissipate in the short-term.

Although options for bettering ones situation exist,there is plenty an investor may do to protect their present assets. For those with debts based on floating rates,now may be the best time to starting making substantial payments before rates start to climb. Our view of this is that over the next few quarters,there could be a substantial rate increase on the loan side as RBI tries to fight inflation. So we are inviting customers with liabilities on a floating nature to actively repay or partially repay any loans they may have,depending on their liquidity, Dhawan said. Our number one recommendation to investors,because it is very hard to tell how far rates will go up,but now is the time to start pre-payment.

kartikay.mehtrotraexpressindia.com