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64How To Invest Wisely When Interest Rates Are Near Record Low?Jul-27-2020

How To Invest Wisely When Interest Rates Are Near Record Low?

Blog by – Mr. Ashish Ajmera

Interest rates are falling globally in recent months and India is witnessing a similar action. The wide acceleration of Covid-19 and extreme worries on the economic front has triggered a sharp reduction in benchmark interest rates from major central bankers around the globe. The major global financial markets have soared following this. In India as well, the Reserve Bank Of India (RBI) has resorted to an easy monetary policy which means a sharp drop in the central bank`s interest rates. Major stock brokers in India provide timely and in-depth analysis of the various policy steps taken by the RBI. 

While low-interest rates are ideally intended to encourage consumption demand and investment flows, they also end up pulling down the returns from risk-free financial instruments like fixed deposits and small saving schemes. How does an investor approach this scenario where interest rates in India are near about the lowest levels in a decade and a half and stock markets have managed to carve out an excellent rebound from their March 2020 lows?

Remember that with ultra-low borrowing costs, companies can expand their businesses more quickly. Look to invest in companies that were in the process of increasing their footprints in various businesses and can benefit from it. This typically includes capital intensive businesses with a high entry barrier and a well-established product line. 

A sharp drop in interest rates has been instrumental in raising financial asset prices which in turn means elevated equity indices. Normally an episode of ultra-low interest rates leads to good returns in broad indices as evidenced by the impressive pullback of around 40 percent in Nifty from its low year low. 

However, also keep in mind the reason why interest rates have been cut so drastically in the first place and monitor it closely to understand the broad trend in economic growth. In the current case, it means that a constantly rising count of Covid-19 cases globally and India needs to moderate for the economy to find a firm footing and marches towards recovery. 

Not all investors would find falling interest rates comforting. If one is a risk-averse investor or a senior citizen without a substantial surplus of funds, then such individuals normally prefer putting money in a safe saving instrument like a Fixed Deposit. However, with the returns linked to such deposits also falling in tune with the RBI interest rates, it is advisable that even such investors look to diversify their savings basket by investing in products like index funds. 

Gold is also a great beneficiary of ultra-low interest rates. One of the biggest consequences of the falling global interest rates is a devaluation in the value of major currencies. Look at the awesome swing in Gold prices over the last few months, particularly the massive spurt in global Gold prices to their nine-year high above $1800 per ounce. Gold has rallied as major global central banks have cut their interest rates to near zero percent and have poured in a lot of liquidity in the markets, thereby pushing up the value of Gold relative to major currencies.

Even in India, Gold prices have jumped to Rs 49000 per 10 grams, defying the lack of demand in retail spot markets. For a savvy investor, it makes sense to invest a tiny amount in Gold on a consistent basis in such a scenario. Gold tends to outperform the other assets in times of uncertainty and the local prices are up nearly 25 percent from year to date. According to monthly data released by the Association of Mutual Funds in India, net inflows in domestic gold ETFs were at Rs 2 040 crores in the first quarter of the current financial year. 

Outlook

Keep in mind that the ultra-low interest rates make borrowing money cheaper. In a once in a century kind of a shock like Covid-19, the central banks, by cutting interest rates sharply, are ensuring that the governments, corporates, and individuals can borrow money at an extremely cheap rate and that in turn gives them more money to spend. So effectively, the falling interest rates is an effort directed at stimulating spending in the economy. With the prompt action from major central banks, global interest rates have dropped sharply and should provide a floor to the economic downturn caused by the Covid-19 menace. It is important that savvy investors keep in mind that a smart and diversified investment portfolio is important at such times. 

Read More: Unlock Financial Wellness Using Stock Markets

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