What rising interest rates mean to income investors
Higher rates can be tough on borrowers, but as Chris Paton, chief investment officer of La Trobe Financial, explains they can offer welcome opportunities for income investors.
After an extended stretch of low interest rates, the rate cycle is shifting, and although rising rates won't be welcomed by all, they are good news for investors whose income is responsive to interest rate changes.
That said, there is no room for complacency.
Rates have climbed higher in response to increasing inflation.
This is especially noteworthy for income investors.
If your investment returns are not outpacing cost of living increases, the purchasing power of your money is declining. And this has the potential to impact your standard of living.
With this in mind, let's look at how income investors have the potential to boost their returns, often without dramatically altering the risk profile of their portfolio.
Review your current investments
The starting point to making the most of rising rates is to know how your current investments are performing.
It is surprising how many investors are in the dark on this score.
Research consistently shows, for instance, that many Australians don't know the rate they are earning on personal savings.
If it's been a while since you last reviewed your portfolio, now could be the time to get a clear picture of your investment returns, particularly in regards to regular income, and whether it is responsive to changes in interest rates.
Know the benchmark to beat
Inflation is currently sitting at 4.6%, the highest it's been since late 2023.
As an income investor, this is the benchmark to beat.
Remember, if you're not earning above the inflation rate, the value of your assets, and quite possibly your income, is likely going backwards in 'real' (i.e. after-inflation) terms.
It is also worth keeping in mind that retirees can be hit especially hard by rising living costs because they may spend more on essential items where price growth has outpaced the overall inflation figure.
Private credit - opportunities for more rewarding income returns
Australia's growing private credit market gives income investors a chance to invest in the nation's non-bank lending market.
Driven by reduced bank lending, private credit has enjoyed substantial growth in recent years, with the market currently worth around $234.5 billion in Australia alone.
For income investors, private credit can tick plenty of boxes - with the potential to generate healthy returns that are distributed as regular income.
Highlighting the appeal of private credit, a report by accounting firm EY shows 81% of investors in private credit expect to increase or maintain their allocation to this asset market over the next three years.
This same report confirms a growing number of private credit funds have been launched in response to investor interest.
However, when you rely on investments for regular income, it pays to consider the track record of any investment provider.
As one of Australia's largest alternative asset managers, La Trobe Financial has been part of Australia's financial landscape for over 70 years.
Our investment options span a variety of timeframes: each offers regular returns plus low volatility, and all are backed by quality mortgage assets and Australian cash.
As a guide to returns, our flagship 12 Month Investment Account has consistently delivered competitive, variable monthly income to investors for almost 30 years.* This $11+ million fund is backed by the diversification of almost 12,000 individual mortgages, and has been awarded Money's Best Private Credit Fund - Mortgages for 17 consecutive years.
For opportunities that can help you make the most of rising rates, contact the La Trobe Financial team on 1800 818 818 or visit latrobefinancial.com.au to find out more.
La Trobe Financial Asset Management Limited ACN 007 332 363 Australian Financial Services Licence No. 222213 Australian Financial Services Licence No. 222213 is the responsible entity of the La Trobe Australian Credit Fund ARSN 088 178 321. It is important that you consider the Product Disclosure Statement (PDS) before deciding whether to invest or continue to invest in any of the funds. The PDSs and Target Market Determinations are available on La Trobe Financial's website.
*Past Performance is not a reliable indicator of future performance
Any Financial product advice is general only and has been prepared without considering your objectives, financial situation or needs. You should, before investing or continuing to invest in the La Trobe Australian Credit Fund, consider the appropriateness of the advice having regard to your objectives, financial situation or needs and consider the PDS for the fund.
When considering whether to invest or continue investing in the La Trobe Australian Credit Fund, you should be aware that (1) an investment in the fund is not a term deposit, and your investment is not covered by the Australian Government's deposit guarantee scheme. Investing in the fund has a higher level of risk compared to investing in a term deposit issued by a bank and (2) there are other risks associated with an investment in the fund. The key risks of investing in the fund are explained in section 9 of the PDS, available on our website.
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