The markets are in deep red prompting many investors to allocate a part of their earnings to traditional schemes like fixed deposits (FDs). The FDs rates are increasing with some banks even offering record-high interest rates.
Popular lending institutions like Punjab National Bank and Bank of Baroda raised interest rates on their FDs with effect from January 1 and December 26, respectively. Investors depositing their money from one year to 665 days will earn 6.75 per cent per annum.
However, term deposits for 666 days will continue to offer the same rate of interest, i.e., 7.25 per cent which is still higher when compared to interest rates offered earlier. However, any FD beyond three years will attract only 6.5 per cent every year. Similarly, term deposits with Bank of Baroda offer 6.75 per cent interest on one-year deposits.
Some small finance banks like the Unity Small Finance Bank are offering as high as nine per cent to their senior citizen customers on FD investments ranging between a week and 10 years. Other retail investors can earn 8.50 per cent interest for the same tenure. Similarly, Suryoday Small Finance Bank is offering FDs with maturities ranging from a week to 10 years at interest rates for the general public of 4.00 per cent to 8.51 per cent and for senior citizens of 4.50 per cent to 9.05 per cent.
In the current rising interest rate scenario, investors are not sure if they must wait for a while to invest in FDs or should start investing in small lots. Muthukrishnan, a Chennai-based Certified Financial Planner says, “It is difficult to time interest rate cycles. Once inflation stabilises, interest rates hike would stop. Banks also would not rise FD rates subsequently. The current FD rates are good. Instead of being greedy and trying to time RBI moves, better to lock at current rates. FDs can be taken for a period of five years or more as your returns would not be affected for the above period even if interest rates start going down.”
Many investors are undecided on what percentage of their portfolios should they invest in FDs. This kind of indecisiveness is common considering how many people had quit their FD investments to park their money in equities, debt funds and bonds owing to the meagre interest rates they offered. Now that FD rates are rising, many investors are unable to decide how much of their earnings should they allocate to FD investments.
Suresh Sadagopan, MD & Principal Officer, Ladder7 Wealth Planners says, “The amount in debt or equity instruments is actually a strategic asset allocation based on risk versus reward, tenure & liquidity needs, taxation, income generation needs, etc. How much to invest in FD in a rising market is a tactical call. Interest rates are expected to rise a bit more, but we are nearing the top. In such a scenario, one can lock in medium to long-term deposits (or specific tenures that offer the best rates, like say 660 days) that offer good rates. However, the FD interest is treated as income and is taxable which brings down the post-tax returns. One needs to see if that makes sense or else, target maturity funds of suitable duration may be a better choice.”
Investment tenure matters too considering how banks and financial institutions offer different interest rates subject to investments for differing tenures. For example, Bajaj Finance Ltd offers 7.85 per cent interest on a minimum investment of ₹15000 for three years and eight months while the interest rate would be limited to 7.70 per cent if the money is invested for two years and nine months only.
Similarly, Axis Bank is offering 7.26 per cent interest on a minimum deposit of ₹5000 for two years but 7.10 per cent interest for deposits limited to one year and 25 days only and seven per cent when deposited for three and five years.
Viral Bhatt, Founder, Money Mantra says, “The maximum tenure for a fixed deposit investment is typically determined by the investor's financial goals and risk tolerance. However, a general rule of thumb is that the longer the tenure, the higher the interest rate. In a rising interest rate environment, it may be beneficial for an investor to choose a longer tenure in order to take advantage of the higher rates. It is also important to note that while longer tenures may provide higher returns, they also lock up the invested funds for a longer period of time, which could be a disadvantage for some investors. Overall, it is important for investors to consider their individual financial situation and goals when deciding on the tenure for their fixed deposit investment.”
Many investors are pessimistic regarding the current trend in market movements. The markets have undergone correction multiple times in 2022. The new year did not start on a much positive note either.
Regarding how much money one should invest and for how long, Dev Ashish, a SEBI-Registered Investment Advisor and Founder of Stable Investor says, “There is nothing right or wrong when it comes to deciding the percentage of the total portfolio that should be parked in FDs. But for the money that is to be invested for the next up to one to five years, one can consider parking that money in FDs. But given the investor-unfriendly taxation of fixed deposits (taxed as per tax slabs), it is advisable to not park a lot of funds in fixed deposits. Better to look at debt funds which offer reasonable but better post-tax returns if held for more than three years due to indexation benefits.”
Ashish added, “For those who wish to park money in FD, it’s better to not lock in all the funds in FD in one go. So, while FD rates have definitely become much better than what they were in the recent past, they can increase a bit more. One can consider laddering their FD investments for the time being. This requires one to divide and spread your money in FDs over multiple smaller FDs with different maturity periods. This not only gives you a chance to earn better returns in the rising rate environment but also helps better manage your liquidity requirements. For the money not required for at least five years or more, FDs should not be used as one should allocate some funds to equity funds as well..”
Putting money in FDs is not a new or novel investment decision. These traditional deposits have always remained an important aspect of many investors’ financial portfolios. However, it would help if investors take into consideration various aspects before deciding to park their earnings in the same.