Safe Investment Strategy When Interest Rate Increases

As a bank customer, you must be familiar with interest rates. In simple terms, bank interest rates can be interpreted as remuneration provided by banks to customers who buy or sell their products.

 

Interest can also be interpreted as the price that must be paid by the bank to customers who have deposits and the price that must be paid by the customer to the bank if the customer gets a loan facility.

 

As an investor, you are advised to pay attention to bank interest rates. This is because bank interest rates can affect investment. So, what happens when interest rates change? Come on, read this article to find out the answer!

 

What Happens When Interest Rates Rise?

An increase in interest rates or interest rates certainly has an impact on several things. Therefore, this interest rate affects Interest is one of the benchmarks that encourage the economic growth of a country. Policies made by Bank Indonesia can have an impact on various sectors of economic activity. For example, the circulation of financial/banking flows in the form of savings, investment, to inflation, which is strongly influenced by the movement of the rupiah exchange rate.

 

 

BI as the central bank decides to raise or lower the benchmark interest rate based on considerations of inflation conditions or price increases in the market. If there is unstable inflation, or there is a significant price increase, BI will start to decide to increase interest rates. Then, the ups and downs are also influenced by economic conditions at home and abroad.

 

Here are some things that happen when interest rates increase:

 

Effect of Interest Rates on Production Capacity and Loan Portfolio

Over time, the increase in interest rates by the Central Bank will have an impact on the amount of production. It is actually the positive side in the form of an increasing workforce and increased production.

 

The increase in interest rates also encourages increased export capacity so that the number of unemployed also decreases after a large number of workers are absorbed in the industry.

 

The long-term effect of this increase in interest is that foreign exchange entering the country will be even greater. Then, it can further strengthen the exchange rate of the domestic currency.

 

However, there is something to note from credit risk management, interest rates that have increased are often feared by creditors/commercial banks.

 

Why is that? For example, for the property industry, it can result in a declining level of housing sales. If forced, this will have an impact on bad credit.

 

The Effect of Interest Rates on Gross Domestic Product (GDP)

This interest rate also has an impact on GDP or Gross Domestic Product. Where GDP is one indicator of the level of health of the economy of a country.

 

GDP is also one of the main indexes of national account systems for measuring the cost of goods and services. GDP basically shows the condition of the national economy.

 

The Influence of Interest Rates on Public Housing Loans

The increase in interest rates also has an impact on people's housing loans, because housing procurement is an important part in supporting the welfare of human life. The increase will affect the people's purchasing power which decreases towards housing products.

 

A decline in the purchasing power of new homes could eventually slow the economy and push it toward a recession. On the other hand, if there is an increase in the number of new housing units, it will indicate economic growth in a country.

 

The Effect of Interest Rates on the Unemployment Rate

The increase has a further impact that must be considered, namely, the sluggish economy which will have an impact on decreasing job opportunities.

 

In addition, the production process has decreased also have an impact on reducing the number of employees. Unemployment can occur as a result of an imbalance between the existence of jobs and people who need work. So that only a few people get the opportunity to work.

 

In fact, the policy of raising interest rates is intended to provide incentives from banks to the public so that they invest their funds in banks. To encourage this interest, a policy was made to increase deposit interest rates so that people would be more diligent in investing their funds in banks, for example by saving, in the hope that they would make a profit.

 

Investment Options Amid Rising Interest Rates

Quoting from kontan.id, Head of Investment Research Infovesta Wawan Hendrayana once explained that for the stock market when facing an increase in interest rates, the stock price will actually depend on the fundamentals of each issuer. So far, judging from the cycle when there is an increase in inflation and interest rates, it is the commodity and financial sectors that usually benefit.

 

Meanwhile, for the bond market, an increase in interest rates has the potential to increase yields and lower bond prices. However, currently the bond market has strong support from domestic investors. Thus, even though foreign investors leave the government bond market, price movements in the bond market will be more stable or experience a decline but not deep.

 

So it is better if an investor diversifies his investment in stocks by 40%, bonds 40% and 20% in the money market or deposits. For deposit yields will usually increase when interest rates are rising.

 

Investment Strategy when Interest Rates Increase

Then what is the safest investment strategy when interest rates rise? Quoting from coil.com, the rising interest rate sentiment is considered to be correlated with the performance of portfolio investment instruments, including mutual funds.

 

Therefore, investors to pay attention to the development of the increase before allocating investment.

 

It was explained that bond investment assets were considered more sensitive to the increase in interest rates. However, the difference in real yields against inflation in Indonesian bonds is still far more attractive than in other developing or developed countries.

 

Meanwhile, for this stock instrument, it depends on the company's performance in recording revenue/profit growth. In situations of rising interest rates, investors usually tend to be more selective in looking for quality companies with good cash flow.

 

Equity mutual funds that have an investment strategy into superior or blue chip stocks can be an investment choice in the current situation. A correction in the stock market can be the right opportunity for mutual fund investors who have long-term goals.

 

Then, for investors who have short-term investment goals with a conservative profile, they can provide a large portion of investment allocation big money market mutual funds. This is because it is considered more stable and minimal fluctuations. Moreover, this trend of rising interest rates has the potential to bring higher returns on this type of mutual fund.