Here is What You Can Do In This Rising Interest Rate Scenario!

If the investment period is for less than 6 months it is important that you see the level of liquidity you can enjoy since these funds should not be locked up for a period longer than 6 months. The best form of liquid asset is your Savings Bank account, however this is not recommended since the bank provides just 4% interest on your deposits which is too less when compared to the tenor of 6 months. Instead investing in liquid funds can prove to be much more advantageous since a hike in the policy rates will lead to increase in the short-term rates enabling you to get returns up to 8.5-9% per annum currently than what was about 5% a few months back. In order to benefit from such a fund it is important that you align your fund maturity period to the maturity period of those securities that the fund comprises of. This will enable your fund to mature at the same time as that of your fund thereby giving you good returns at the end of the investment period.

Ultra short-term funds are also a preferred option since they currently offer you pre-tax returns of 8.5-9.5% per annum compared with 5.25% in December 2010. They give you the flexibility of entering and exiting the fund as and when required however, there are some funds which carry a load for exiting if you are exiting the fund within 7-15 days. Therefore as a prudent investor check these charges before investing. Also, Ultra short-term funds have a significant tax advantage over liquid funds thereby giving you tax free returns.

If the loan tenor is for a period of 6-12 months, a combination of liquidity and returns will be advisable.

Some short-term income funds are better for this tenure since their current annualized returns are around 9-11% in December 2010; the rate was around 5%. These funds, charge an exit load if you exit the fund before a period of three-six months. In order to ensure a safe haven for your investments it is important that you check the credit rating of such funds and opt for those funds that have an AAA rating

Fixed deposits (FD) and FMPs are suitable instruments if you are looking towards investing for this tenor. FDs are being offered at 8.5-9.5% over one-two years also some private sector banks are offering returns as high as 10% p.a. A one-year FMP, too, is giving between 10-11% annualized returns, though FMPs will neither indicate nor assure any returns. What you need to know is that for FMPs, the effective tax rate is 13.519% whereas Fixed Deposits on the other hand are taxed at a marginal rate.

If you are a risk averse investor, but want to see your investments in these interest rates scenario, you can look towards investing in bonds and other non-convertible debentures. What must be noted here is that bonds work inversely to the interest rate changes. If the rates go up, bond prices also go up and vice versa. But with the decline in the trading volumes, there is a high liquidity risk involved if in case you wish to exit before the maturity of the bonds. Investors need to be careful about the returns provided by these assets since a higher return would mean greater amount of risk- risk of default risk of credit. Therefore it is important to look at the credit ratings before opting for such instruments.