Low interest rates on fixed deposits (FD) and other fixed return investments amid a higher rate of inflation have put conservative investors in a tight spot.
FDs are inflation-inefficient investments and even in a normal situation can hardly beat the levels of rising prices.
Low interest rates on fixed deposits (FD) and other fixed return investments amid a higher rate of inflation have put conservative investors in a tight spot. With no or very little risk-taking capacity, the situation is very much worrisome for senior citizens.
That is because FDs are inflation-inefficient investments and even in a normal situation can hardly beat the levels of rising prices. Moreover, tax on the entire amount of interest earned results in loss of purchasing power of the money invested or devaluation of the capital on maturity.
In the current scenario, what should FD investors do to minimise the devaluation?
“Given this backdrop and also the current fiscal scenario, investors may be better off focusing at the shorter end of the yield curve. Investors may look at investments in the 3-5 year debt space. The returns from such schemes should be in the range of 5.50-6 per cent,” said Sameer Kaul, MD & CEO, TrustPlutus Wealth Managers (India).
The Reserve Bank of India, however, has little choice to make things better for investors as the sluggish economic growth demands lower key policy rates, while a rate hike would help in bringing the high inflation rate under control.
“Inflation remains above the upper bound of the RBI’s target range of 2-6 per cent and economic growth has recovered at a pace faster than earlier anticipated. However, the economic recovery needs to get more broad based and sustainable and the recovery is still dependent on policy support from the RBI,” said Kaul.
The tricky situation has made the RBI keep the policy rate unchanged at the current level.
“Also, the RBI projects that inflation will come off in the next few months. As a result, the RBI has looked through the high inflation numbers in order to support growth. Given this backdrop and also the current fiscal scenario, investors may look at debt investments which have a 3-5 year maturity. The returns from such schemes are in the range of 5.50-6.00 per cent,” said Kaul.
So, for what duration investors should invest in FDs?
“Further liquidity measures by the RBI may result in rates continuing to be low for some period of time. As a result, rather than focusing on the extreme short-end, investors would be better of focusing on debt investments with a 3 to 5-year maturity,” said Kaul.