When lower rates are on the horizon, investors tend to have mixed reactions. Those who prefer fixed investments like fixed deposits (FDs), bonds, debentures, and savings accounts become frustrated at the low returns. However, stock markets and corporations prefer low-interest rates because they see an opportunity to borrow capital at this lower rate and funnel it toward expansion and growth. A smart portfolio contains diversification between stocks ,medium term interest-earning investments like FDs, bonds etc and short term interest earning investments like money market funds, savings etc. So what should you do when interest rates are low?
Look for banks/ financial institutions who have both quality and higher yields
When keeping your essential money, it is always advisable to find the correct institute and the optimum bank account. One tip anyone and everyone can and should do is to shop around for an attractive interest-earning savings account in a secured and established bank/financial institution. You may be surprised to find that your standard savings account likely only yields 2-3% interest, whereas it is possible to find accounts yielding between 5-7% interests. Visit local bank branches/financial institutions and check online to see what you are eligible for and what is offered in your area. Most of the times, the same bank offers different savings accounts at varying rates. Even a simple switch to an account that earns 5% would be a 2x improvement over the account that earned 2-3% interest. However it is extremely important to do a background study and understand the quality of the financial institution and the strength of their balance sheet.
Plan the tenure of your fixed deposits looking at the interest rate cycle
When investing in fixed deposits, it is always wise to look the interest rate outlook of the economy and adjust the tenure of your fixed deposits accordingly. In a low interest rate regime as what is prevailing in the economy now, it is best to lock in your investments for a shorter period instead of going for longer terms. Thereby you should be able to re-visit your investments and go for long term investments and enjoy a better yield, the moment interest rates go up. This also requires for you to be vigilant and be ready for action depending on the economic conditions.
Explore Unit Trust Funds
Unit Trust Funds or Mutual Funds as they are known in some countries, operate on a simple premise. The underlying concept of a unit trust fund is, where a pool of money collected from different investors are used to invest in different financial instruments based on a pre-agreed criteria. Funds can have names that indicate their goals, such as "Equity" Fund - suggesting that the money in the fund is being invested in stock market which will have a variable return depending on the market situation and thus carries a higher risk or "Gilt" Fund - containing government treasury bills/bonds, which are generally low risk and low return or "Money Market" funds which invest in short term interest earning instruments etc. Each investor gets units from the fund denoting his or her initial investment. The investors can get their return when they sell their units in future at the prevailing unit price.
Ask about money market unit trust funds. These typically provide an attractive return and are uniquely diversified in an effort to preserve capital and earn interest. Furthermore money market funds can be used to make monthly contributions and build a corpus over a long term period whilst enjoying an attractive interest, an ideal way to plan your investment goals such as buying a house/vehicle or even your dream wedding. Money market funds also are an ideal tool to invest your essential money, since it gives an attractive return with the flexibility to withdraw anytime. Talk with an investment advisor to assess your market risk tolerance and find out which funds may be a good fit for your personality and your financial goals.
Check out Real-Estate
Buying out real estate should be evaluated, by looking at whether you are using your own cash or borrowed money. In a low interest rate environment, property prices can go up due to increasing demand, hence if using your own money it will be an expensive investment. However if you are planning to borrow, due to low lending rates, it would definitely give you an edge in the long run. Owning real estate property in addition to market investments is a great way to diversify. Real estate properties have the potential to create cash flow in the short term and capital appreciation over the long term. Consider renting out a room or a portion of your home in the short-term and use that income to build savings toward the eventual purchase of a stand-alone rental property. Becoming a landlord comes with responsibility for providing quality living conditions for tenants, but, if done well, you will have low turnover, a high referral basis, and fully occupied properties with well-paying renters. You have the opportunity to strategically use cash flow from one property to purchase the next rental property and build a portfolio of rental real estate in addition to your other investments.
Investigate Insurance Products
Depending on your investment goals, it may be valuable for you to investigate products offered by insurance companies. These investment options may include savings plans, life insurance, pension plans, endowment policies, education savings plans for children, etc. All your short to medium term investments will totally depend on your health and wellbeing and your ability to live without any adversity. Hence obtaining a life insurance and/or a pension plan can be considered something as essential. Life expectancy rates are also increasing, so savings and retirement plans have become more attractive in recent years.
This will not only safeguard yourself but also your family and dependents. Further now that Sri Lanka has the highest literacy rate in South Asia, more students are expected to pursue higher education, thus parents' attention may be drawn toward educational savings plans. However it is advisable to evaluate different insurance companies and their policies prior to committing to a plan. In the evaluation process it is important to conduct a due diligence on the selected insurance companies, in terms of their financial strength, solvency ratios, past performance, claim settlement ratio, customer service capabilities, scope of network, online platforms etc. to obtain a better understanding. Once you are satisfied with the company, you need to get into the details of the policy, understanding its features, tenures, premiums, maturity dates and charges etc.
Go Against the Trend
As a general rule, when everyone else is buying, save your cash, and when everyone else is fleeing the market, buy up the deals. Especially in times of economic distress, analyze the actions of the general public and decide for yourself what action to take with your energy and your money. To avoid getting caught up in hype and hysteria of economic news, it helps to evaluate the long-term trends and see that overall, things move upward.
Low Rates Are not the End
A period of low-interest rates, while frustrating for investors, isn't the end. In fact, it is just the beginning! Take advantage of low rates by exploring refinancing options on any loans you already have (like mortgages and car loans) so you can lock-in a reduced rate and enjoy the savings for years to come.
Meanwhile, invest a percentage of your cash reserves in money market funds, insurance products, or even in individual shares of businesses you love through a broker. Maintain a focus on diversification by deciding ahead of time what percentage of your cash you are comfortable investing in each category. When you consistently invest with your goals in mind, regardless of what the market is doing, and you maintain a long-term investor mindset, you are actively making choices toward a more financially secure future.
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