Interesting Phase of Investment

As you have been watching, this is an important and interesting phase of Investment. Macro Economic factors like Inflation inching higher and higher day by day. As a consequence the 'Interest Rates' are also on the up move. Even the 'Gold' cannot be ignored.

However, word of caution on Gold.

Gold is generally treated to be a hedge (Insurance) against inflation. But, the emergence of HEDGE Funds, who borrow money and trade on margins (Buying house on loan type) are pushing the prices of gold higher and higher. Can the prices of Gold sustain at such high levels forever? May be or may not be. However, in all this hype on 'Gold', investors have ignored another metal called 'Silver', which has made more money than gold made. Bottomline: Make sure at least 4 - 8% of your portfolio is GOLD. As the saying goes, 'You hate it or you love it but you still can't ignore it".

Coming Back to INFLATION. In order to bring inflation under control, the RBI has increased Interest Rates. All the Retires, Fixed Deposit Investors are happy. So if you are looking for a long term of fixed income at high interest rates then this is probably the perfect time to LOCK-IN some part of the portfolio. So go for an " FD " or FD like any investment with longer period.

INFlation has been negative for banks (Give higher interest on FD, considerable lower interest on LOAN!!), large companies which borrow funds to grow and other business which borrow regularly. If interest goes up people will stop buying 'Luxury' goods like high end cars, houses, and other discretionary spending will get affected.

Inflation and interest rates increase are directly proportional. This cycle usually lasts for 1 - 3 years based on the trade off between Growth and inflation curb. The BANKS will be worst hit of all this because:

1. High rate on FD, Considerable low rate of LOAN (the difference become small)
2. People would not interested in taking loan at higher rate (Slowing Credit Growth)
3. If not much business, not much profits means lower and lower stock prices.

Based on this 'WE CAN TAKE A CONTRARIAN CALL' to buy BANKS NOW at cheaper prices and wait for the INTEREST RATE cycle to play out. Potential Avenues of investment into banks is to buy the BIG ones like SBI, ICICI, HDFC in no particular order. Or invest in BANKING SECTOR FUND which would give an exposure to nearly all major banks. This can be done either by a short horizon large investment SIP with paying period of 1 year.