The rate of interest on investments is one of the strongest indicators of economic activity. They directly affect the consumption of people and can also impact the day-to-day life of general people. The cut in the rate of interest has positively impacted the borrowers, but the lenders, savers, and investors have negatively impacted.
The falling rate of interest makes borrowing easier. In other words, we can say that cost of funds or loans becomes comparatively cheaper. This increases the number of people who avail of auto loans, home loans, and various other loans that help to fund large or small credit base purchases like cars, homes, etc.
This increases the demand for such products helps to improve the economy of the country. Inversely, the rise in the rate of interest dampens consumption because of higher borrowing costs. However, the savers get benefits in such scenarios because they get an attractive rate of interest on their deposits and savings.
Let us take a closer look into the currently falling rate of interest, analyze the impact of the same on investments and savings and get to know what should be done for staying protected or get benefit from the current situation.
The interest rates are falling constantly in the last three to four years. The primary reason for the cut in interest rates is fragile economic conditions and rate cuts by central banks across the world for simulating the economy. Such conditions lead to excess liquidity that makes access to the funds more affordable. This trend is being noticed since the demonetization that took place in the year 2016.
The decline in interest rates has flattened lately, but due to COVID–19, it is accelerating. The pandemic has forced the central banks of the world to lower the interest rates to stimulate the economy. Resultantly, many countries are even facing zero to a negative rate of interest.
Falling rates of interest consecutively drop the investment yields and income. Currently, the FD interest rates of all banks are falling. The investment options that are considered safe like savings bank accounts, and bonds are also getting affected negatively because of the drop in interest rates.
Even though the investors and savors are seeing a considerable drop in return and income which are a result of falling rates of interest, there are as well few options available as bonds fixed income mutual funds, and deposits that can give benefits in this situation.
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Most investors worry about falling interest rates on investments of fixed income, however, mutual funds can position themselves to provide benefits from falling rates of interest. So, in the current times when FDs are providing low rates of interest, you can opt for these alternate investment instruments.