Recently RBI hiked interest rates to control inflation. It will be painful if you are paying EMI every month.
We are going to cover 5 ways to make money when interest rates rise.
1. Investing in Bonds
You can invest in bonds if you don’t mind taking on some risk or having your access to your money limited.
Investing in bonds is similar to giving money to the government or corporation issuing the bond. You will get your initial investment plus interest when the bond matures. You may invest in government bonds or bonds issued by large corporations.
There is a wide range of interest rates and repayment lengths available for bonds, with higher interest rates often being offered for bonds with a greater level of risk. Bonds with longer maturities and corporate bonds with a greater default risk often have higher yields.
Bonds can lose value as interest rates rise, so that’s something to keep in mind. Therefore, you may have to sell your bond to someone else before it matures for less than you originally paid. Bonds are a safe method to diversify your portfolio and boost your funds’ income without taking on too much risk.
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2. Invest Money in Medical & Technology Stock
Some shareholders prefer dividend-paying corporations because they distribute a percentage of their profits to their investors. A long-term growth strategy that takes interest rates into account may be more your speed.
In order to invest in future growth potential, technology and healthcare companies keep a larger portion of their income as retained earnings than do companies in other industries. Historical data demonstrates that the health care and technology sectors outperformed the S&P 500 Index on average during times of increasing interest rates.
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3. Use bank rewards currently available
When you open a new bank account with certain criteria met, you may be eligible for a welcome bonus. If you want to earn a checking account bonus, you’ll need to do things like complete a certain amount of transactions per month and sign up for direct deposits.
Bonuses on savings accounts may be a simple method to boost income for those who already save regularly. In order to qualify for these incentives, new customers are often required to deposit a certain amount into the account and maintain it there for a set length of time. In a short, you may increase your savings by creating a new account and transferring funds from an existing savings account at a different financial institution.
You should read the terms & conditions. There may be a penalty if you attempt to shut your account too soon after opening it or if you don’t match the bank’s criteria. If you shut your account shortly after receiving the bonus, some banks may even require you to pay back the bonus.
4. Invest in Short term bonds
If bonds are part of your asset allocation, and interest rates are on the rise, you might consider purchasing shorter-term bonds. The longer the tenure of a bond, the more its value will decline in response to an increase in interest rates.
When owned until maturity, an increase in interest rates will not affect the cash flows of bonds. Bonds with low coupons and extended timeframes before maturity may fall rather much when rates increase, so be aware of this if you use bonds as portfolio ballast or want to sell them before maturity. Those bonds often have longer maturities and are more sensitive to interest rate increases.
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5. Take Advantage of CD
Interest rates on CDs (Certificate of Deposit) are often greater than those on regular savings accounts. However, your withdrawal options will be more limited.
Money invested in a certificate of deposit (CD) must remain in the account for the specified time period (the term). Money deposited into a one-year CD, for instance, must remain there for the whole year. Premature withdrawal of principal results in the allocation of a penalty.
Locking in an interest rate when you open a CD is one of its advantages. You will continue to receive the same rate no matter what happens to market rates. However, if rates increase, you will continue to receive the lesser rate until the CD expires.
After the CD’s term expires, you have the option of either withdrawing the funds or transferring them to a new CD. If you decide to transfer your CD balance to a new CD, you will have to wait until the new CD matures before you can make another penalty-free withdrawal.