5 Tips to Fight Inflation and Make the Most of Rising FD Interest Rates

5 Tips to Fight Inflation and Make the Most of Rising FD Interest Rates

The cost of everything from groceries to fuel has been rising over the past few months with no signs of moderating for at least the next few quarters. In such a scenario, it is important to know some techniques that can help you stay ahead of inflation as it reduces purchasing power and even savings if not managed properly.
The Reserve Bank of India (RBI) has raised repo rates to control runaway prices and tighten liquidity in the system. These increases will first affect home loan borrowers with an increase in EMIs, but will at the same time benefit term deposit holders.

The burden of rising inflation can be reduced through better management of money and investments.

Emergency fund

Keeping some money in savings in the form of an emergency fund will help the saver avoid future debt should the need arise. The emergency fund should ideally be equivalent to 3-6 months of the family’s usual monthly expenses. During financial crises, companies tend to lay off workers in order to cut costs. Emergency funds are helpful for employees who happen to be the victims of such an unfortunate scenario.

Adjust your savings

You can distinguish financial motivations based on priorities such as investment timeframe and corpus requirements; monthly or periodic investments can be modified according to these factors. Saving for specific goals can help you reach them on time.

Are DFs enough?

Savings on fixed deposit rates despite short bursts of rate hikes can never be enough to build a substantial corpus, so it’s best to invest in stocks with a long time horizon. Generally, FDs may seem like an attractive and safe investment option, but a decent exposure to stocks is needed to build a large corpus to achieve financial goals.

Make the most of rising interest rates

A single savings plan is not enough in the current scenarios where inflation is very high. Ideally, an investor should keep funds in short-term trust funds and small savings plans for capital protection and the achievement of short-term financial goals. In order to take advantage of the rising rate scenario by going for short-term FDs and reinventing the maturity amount at the end of each year, this is called laddering in investment parlance, says Gupta. This method of investing is ideal when interest rates are expected to rise over the medium term.

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Don’t break the FDs

Investors might be tempted to break existing FDs and reinvest the amount to take advantage of rising interest rates. However, it is strongly advised to keep your FDs intact, otherwise your interest income from these investments will be severely affected.

Prepayment: consider a horizon of 2 to 3 years

Finally, it is advisable to take a horizon of 2 to 3 years to repay loans because borrowers must be prepared mentally and financially while repaying existing loans over a long period. Regular repayments in small lump sums on your home loan are a good option. Ideally, a borrower should aim to repay 5% of their outstanding loan amount in one year; However, even one additional EMI each year can negate the impact of rate hikes, says Amit Gupta, MD, SAG Infotech.

“Paying an additional EMI every year would lessen the impact of rising repo rates as well as the burden on the borrower’s pocket due to lower interest expenses,” Gupta adds.

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