As diversification lowers the risk to your investments, the FD portfolio should be spread across banks and various corporates and across tenures.
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With the Reserve Bank of India (RBI) pressing the pause button on rate hikes, investors should lock in bank fixed deposits (FDs) at higher interest rates and select the tenor based on their investment horizon. Most banks are right now offering fixed deposits with 7% or higher rates. The interest rates of small finance banks are even higher than those offered by public and private sector banks and post offices.
As diversification lowers the risk to your investments, the FD portfolio should be spread across banks and various corporates and across tenures. Hold deposits of various maturities, ranging from 180 days to above five years.
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Adhil Shetty, CEO, Bankbazaar.com, says there are several options with large banks and companies that allow an investor to lock into the peak rates for five years or longer. “If you’re locked into a lower rate from last year, you can liquidate your FD and reinvest for higher returns,” he says.
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Many banks are offering special tenor deposits with higher rates (See Returns Barometer). However, as these schemes do not allow premature withdrawal facility, depositors must look at their liquidity requirements before investing in special FD schemes.
Repo rate is not the sole factor influencing the change in FD rates. Naveen Kukreja, CEO and co-founder, Paisabazaar.com, says FD rates are also influenced by the gap between the credit growth rates and deposit growth rates and overall liquidity in the system. As long as the credit growth rates outperform the growth rates of bank deposits, banks would continue to increase their FD interest rates to attract more fixed deposits to meet the increasing credit demand.
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While the pause in policy rate hikes may temporarily halt the interest rate hikes in loans, the same cannot be said about the FD rates. “Existing FD depositors should continue with their FDs till their maturity irrespective of the changes in the repo rate. They should opt for premature FD
closure only if they find a significant gap between the new FD rates and the effective rates on their existing FDs, after accounting for the premature withdrawal penalty,” says Kukreja.
Laddering deposits
As we are close to peak rates, at some point the rates could reverse. So there’s limited scope for higher returns by laddering the rates up. “If you start creating an FD ladder now, you have the risk of laddering the rates down, which will not be a good outcome for you. Therefore, it is more sensible at peak rates to lock in for the longest available FD tenors. Whenever you see FD rates rising, you can always part-liquidate your FD and reinvest for higher returns,” says Shetty.
Bank deposits of up to Rs 5 lakh are insured under Deposit Insurance Credit Guarantee Scheme (DICGC), an RBI subsidiary. Even small finance banks are also classified as scheduled banks and their depositors are covered under the DICGC. The insurance covers each depositor of each scheduled bank for cumulative deposits (including fixed, current, savings and recurring deposits) of up to Rs 5 lakh, in case of bank failures.
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So, depositors seeking higher returns but with highest possible capital protection features should spread their high-yield FDs with multiple scheduled banks in such a way that their cumulative deposits with each of those scheduled banks do not cross the Rs 5 lakh limit.
PRESSING PAUSE
* Most banks are right now offering fixed deposits with 7% or higher interest rates
* The FD portfolio should be spread across banks and various corporates and across tenures
* Bank deposits of up to Rs 5 lakh are insured under Deposit Insurance Credit Guarantee Scheme
