How to allocate your assets in a world with rising interest rates

livemint.com:

₹5 lakh in a savings account (not even a fixed deposit!). So even as we see all this transpire around us, the question that needs to be asked is this: Is your asset allocation geared for a higher interest rate environment? Well, if you are like most people, you have been conditioned for the last 15 years or so to invest in higher risk assets as returns from fixed rate instruments were generally poor (and getting poorer with time). You were, to use a technical but nice sounding phrase, hunting for yield.

Since returns on fixed deposits were not exciting and government savings schemes less so with every passing year, you had little choice but push into equity funds / equities to make that extra return to plug the gap in your income. If you were one of the few who were pampered by large institutions, you were exposed to structured products or high-risk credit products or a combination thereof. Basically, a lot of what you did was because of “there is no alternative".

To make a healthy return, you were forced to take risk, whether you were ok with it or not. But now, the world has kind of changed. Rather, it’s changing.

There is money on the table for people who do not like to take much risk. The point is what you are going to do about it. You see, there are two ways to look at this.

First, as interest rates rise, the relative attractiveness of high risk assets decreases. To give you a simple example: if you have a choice of 5% fixed return vs a 12% possible return but with risk of capital loss, you would probably still opt for the 12% deal. But what if it was 8% vs 12%? You see, a sensible investor would like to earn a lot more over and above the 8% to carry the risk of capital loss as well.