Ever since the COVID-19 pandemic started, the financial sector of every country has been hit hard. India is not an exception. From savings in households to shares in the stock market, all went down drastically. Millions of people became unemployed. The financial condition of the majority of the population went downhill.
Now, as individuals and governments are trying to revive their lost prosperity and happiness, the concept of ‘investment’ has gained more importance than ever. People from all economic backgrounds have begun to focus on making prudent investments. Here, the term ‘prudent investment’ refers to an investment that is safe and beneficial. This often includes fixed income research since fixed income investments are considered largely safe and ideal for pensioners.
The objective behind investing money is to create a secondary source of income. The income, thus earned, can be used to spend, save, or reinvest. Spending the income generated from investments can improve the standard of living of people. Those, who want to play utmost safe, usually opt for saving this income in bank accounts.
It’s a known fact that every country has a large number of risk-takers. These people reinvest their income with the hope of making more profits. Irrespective of how the income generated from the investment is used, this income serves as a guarantee that people will not face an economic crisis. Thus, people can experience peace of mind when it comes to financial matters.
What happens when interest rates increase?
Many factors affect the decisions made by the investors. One of these factors is interest rates. When the investors buy debt instruments, such as bonds, they earn income in the form of interest. Other types of investments that pay interest are fixed deposits in banks, commercial papers, government securities.
When interest rates go up, which can happen due to many reasons, including but not limited to government policies and supply and demand of credit, people take different steps. The change in the interest rates alters the behaviour of investors in different ways.
People who have to borrow money in the form of short-term credit or long-term credit become reluctant regarding their decision when the interest rates rise. On the other hand, people who have invested money or want to invest money get divided into two categories when the interest rates increase.
The first category comprises investors who become scared of losing their money or occurring short-term losses. The reason attributing to this fact is that an inverse relationship exists between the interest rates and market prices of securities. For example, bonds get traded publicly after being issued, and so, their market prices keep fluctuating.
Let’s suppose bonds of a certain type get issued in the year ‘A’. They have a predetermined interest rate – ‘X%’. When the same type of bonds is issued in the year ‘A + 1’, their interest rate – ‘Y%’ might be lower or higher than ‘X%’. If Y is greater than X, the market price of the bonds issued in the year ‘A’ will fall down. If Y is lower than X, the market price of the bonds issued in the year ‘B’ will increase.
How to Make Profits from Rising Interest Rates
As mentioned above, existing investors and prospective investors can be divided into two categories. The first category has been explained in the section above. Now, let’s understand the second category. This category comprises investors who benefit from the increase in interest rates. They use several strategies for earning profits from this scenario.
Reinvesting the money obtained from debt securities that are about to be matured is one of the strategies. Another strategy could be investing in companies or funds that invest the money collected in debt instruments. This way, those companies or funds will earn more interest than before and pass on the benefit to you and other investors.
Both individual investors and institutional investors (such as mutual funds, hedge funds, insurance companies, and pension funds) invest in debt securities. Now, understanding the ever-changing and complex markets is not simple. Investors might need to rely on experts from time to time. Experts provide investors with services like fixed income research, quantitative research, and credit research.
Asset managers, private wealth managers, investment banks, and other entities engaged in enabling investors to earn the maximum possible returns can implement various strategies for making more income from rising interest rates. As interest is earned from debt securities which are also known as fixed income securities, fixed income research holds great significance for all the involved parties.
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