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How to deal with Interest rate hike? - Save cost, Maximise returns

 

THE monetary policy announcement by the Reserve Bank of India (RBI) on Thursday is likely to impact the economy as well as your wallet. Financial Chronicle suggests the smartest thing you can do to save cost and maximise returns if the central bank decides to hike key rates further.


Whether to swap home loans or not? Unless there is a 4-5 per cent difference in home loan rates between an existing lender and a new lender, experts do not suggest a loan swap. Most home loan companies charge a pre-payment penalty of at least 2 per cent of the outstanding loan amount.


So one should crack the numbers to see if there is really a benefit in swapping loans.


Buying second home can wait: With home loan being the biggest liability of any individual, Thursday's probable rate hike will result in higher EMIs or longer loan tenure or both for those servicing home loans.

For an end user who wants to purchase a house for living, any time is a good time to buy, irrespective of interest rates. But for an investor who wants to buy a second or third house, he should check if the cost of funds would justify the returns that he would get on his investments.


Short or long-term deposits: Deposit rates are increasingly becoming attractive with many banks offering rates of over 10 per cent and this can be expected to go up in the days to come.


But the schemes appear confusing with few banks offering 10 per cent on fixed deposits of one-year tenure and few others offering 10 per cent on deposits of fancy tenures like 444 or 555 days. The catch is on the term `per annum'. If a bank promises 10.50 per cent per annum, on deposits for 555 days, it means that the depositor would get 10.50 per cent for the first 365 days.

It would be unwise to invest in institutional bonds of 10 or 15 years' tenure even if the rates are good, since one or two more rounds of rate hike is still expected. FDs of one, two or a maximum five year tenure would be better investment options. FMPs and short-term bonds for those who know them: For those who are aware of them, mutual fund FMP or short-term bonds are good investment options as they also tax efficient. With mutual fund companies not being allowed to suggest the indicative yield of the products there may be some ambiguity on the returns. But for those familiar with how things work in mutual funds, FMPs could be good options to enter now.

 

 

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