Another repo rate hike by the RBI has brought up financial tensions among retail borrowers and investors. RBI has raised the repo rate by 50 bps to 5.40%, where repo rate means the rate at which the RBI lends money to commercial banks.
On the other hand, the Standing Deposit Facility, or SDF, rate now stands at 5.15%, while the Marginal Standing Facility, or MSF, stands at the rate of 5.65%.
It is expected that banks are up for raising interest rates on retail loans, such as personal, home, and auto loans. Thus, the EMIs on your home, car, or bike loans are expected to rise. According to experts, a hike in interest rates on long-term retail loans will raise the EMIs of at least some existing borrowers as well if their loan is repo rate-linked, especially in the case of home and auto loans.
Now, the question is, where should we all park our money to keep it safe and grow at the same time?
Many investors are confused between FDs and Liquid Funds as banks may increase the interest rate on FDs further. However, liquid funds have always been investors' first choice as they have given more returns in earlier years than Bank FDs.
Let’s understand a few aspects of Fixed Deposit and Liquid Funds, which may help you decide what would be the best for your financial objectives.
Are fixed deposits better?
The three straight rate increases indicate that interest rates on fixed deposit products will continue to rise. Because returns above this level are seen as decent, 8% interest on fixed-term investments serves as an essential benchmark.
Depending on how long the rate hiking cycle lasts, FD rates may reach 8%. There may still be room for a 50-100 bps rise in the upcoming three to four quarters.
What we can do is purchase an FD with a brief term given the current rising interest rate environment. So investing in FDs with a term of six months to a year would be a better choice.
However, a list of a few banks provided good returns. Let’s have a look at that
| Bank Name | 1 year FDs Interest Rates | 2 years FDs Interest Rates |
| RBL Bank | 6.5% | 6.75% |
| Bandhan Bank | 6.25% | 6.5% |
| DCB Bank | 6.1% | 6.6% |
| Indusind Bank | 6% | 6.5% |
| IDFC First Bank | 5.75% | 6.5% |
Note: Returns are compounded quarterly
Are liquid funds better?
Many investors have shown their back to liquid funds due to low returns during the time of recessions due to market volatility and corrections. Ultimately, investors have turned their faces to FDs due to stable returns.
In the debt mutual fund category, liquid funds are regarded as being exceptionally safe. Changes in interest rates least impact them because they only invest in T Bills, commercial paper, and money market instruments with maturities of up to 91 days.
Investors with a shorter investment horizon and low-risk appetite can stick to liquid funds as experts believe that, now, when the market is on its way to taking back the position, it could be the best time to come back to liquid funds.
Here is a short list of a few Liquid Funds which have given better returns during an inflationary period.
| Schemes | 3-Monthly returns (% annually) | 1 Year returns (% annually) |
| SBI Liquid | 4.72% | 3.68% |
| HDFC Liquid | 4.72% | 3.81% |
| ICICI Liquid | 4.72% | 3.67% |
| ABSL Liquid | 4.80% | 3.63% |
| KOTAK Liquid | 4.68% | 3.7% |
Above-mentioned returns are based on historical data. Though, it has been seen that there is an upward trend and might give you expected returns in future.
Not only AMCs, but government securities have also given decent returns when the stock market was hitting record lows on a daily basis. Talking about short-term government securities like T-bills, 91-days are giving 5.62%. And as Liquid Funds invest in 91-days treasury bills, resulting in a high chance of getting handsome returns on your invested corpus.
