At a time when a few banks have reduced their fixed deposit (FD) interest rates, most small finance banks and a few private sector banks are still offering FD yields of 8% and above. Depositors having investible surpluses can book these high-yield FDs, preferably for longer tenures.
Splitting the FD portfolio across multiple banks and tenures can help balance safety and returns. Given the falling interest rate regime, individuals should lock into the highest available rates.
Santosh Agarwal, CEO, Paisabazaar, says opening FDs with multiple scheduled banks can help depositors ladder their deposits across various maturities, reducing their FD reinvestment risk. “The tenures of the highest FD slab rates usually vary across banks due to the variations in their Asset Liability Requirements,” she says.
Deposits with small finance banks
Small finance banks (SFBs) offer higher interest rates on fixed deposits compared to large commercial banks. In the current rate environment, this makes them a compelling option. Some SFBs are offering rates above 8% for retail investors and 9% for senior citizens. Most SFBs require you to open a savings account to invest in FDs, especially if investing directly through the bank.
These banks are regulated by the RBI and covered under the Rs 5 lakh DICGC insurance limit. Avoid placing large sums in one bank and keep your total exposure within the insured limit.
“If using SFBs, combine them with traditional banks or government-backed schemes to create a balanced and safe fixed income portfolio,” says Adhil Shetty, CEO, Bankbazaar.com.
Trim reinvestment risk
Reinvestment risk arises when maturing fixed deposits must be reinvested at lower rates. With deposit rates falling, this becomes a key concern. The best way to avoid reinvestment risk is by using an FD laddering strategy. Spread your investment over different tenures so that not all deposits mature at the same time.
“Laddering ensures part of your money is always earning higher rates, while maturing portions can be reinvested based on the rate cycle,” says Shetty. Another option is to choose cumulative FDs, which reinvest the interest automatically until maturity. This helps lock in returns and delay the reinvestment decision. By diversifying across instruments and durations, investors can significantly reduce the impact of reinvestment risk.
Deposit of NBFCs
Deposits of non-banking financial companies (NBFCs) offer 1–2% higher returns than commercial banks. However, unlike banks, NBFCs do not offer deposit insurance protection under DICGC. Depositors having a higher risk appetite can consider opening corporate deposits. However, they should compare the risk-adjusted returns offered by corporate FDs and that of high-yield FDs offered by small finance banks.
Moreover, the interest rates offered on corporate FDs also depend on the credit ratings assigned to them. Corporate FDs having lower credit ratings usually offer higher interest rates to compensate their depositors for the higher credit risk. Individuals should invest in NBFC FDs that are rated ‘AAA’ or at least ‘AA+’ by reputed credit rating agencies.
Lower-rated FDs carry credit and liquidity risk. Limit your total exposure to NBFC FDs to around 10–15% of your fixed income portfolio. Some NBFCs may charge penalties for premature withdrawal or may have longer lock-in periods. Reinvesting in multiple issuers and durations can help reduce overall portfolio risk.