Banks have reduced their FD interest rates in tandem with the RBI’s decision to cut the repo rate on multiple occasions in the recent past.
With falling interest rates, fixed deposits (FDs) no longer remain as attractive as they used to be earlier. In fact, some of the leading banks — including SBI, HDFC Bank and ICICI Bank — have reduced the FD interest rates so much in recent months that in many cases they appear to be at par with the savings account interest rates offered by many banks.
In fact, savings bank interest rates offered by some of the small finance banks and smaller private sector banks are even higher than the fixed deposit rates offered by the PSU banks and bigger private sector banks. However, the savings account interest rates offered by these small finance banks and smaller private sector banks would vary depending on the balance kept in their savings accounts.
Financial experts say that banks have reduced their fixed deposit interest rates in tandem with the RBI’s decision to cut the repo rate on multiple occasions in the recent past.
“A majority of banks are currently offering interest rates between 4% and 6% on their FDs depending on the investment tenure and the investor’s age. So, it would be safe to say that FDs are currently offering only a bit more than regular savings accounts interest rates (3-5%) with the exception of certain high-interest savings accounts. On many occasions they are actually at par with savings accounts. Moreover, the taxable returns of FDs can further lower the actual returns,” says Adhil Shetty, CEO, BankBazaar.com.
However, the current low rates shouldn’t be the only reason for investors to look beyond FDs as capital protection has become as important as capital appreciation in the current scenario. In fact, techniques like FD laddering can help investors to maximize the investment benefit without taking undue risks.
Which FDs are a better bet now?
Financial advisors say that the existing fixed deposits will continue to earn the interest at the contracted rates till their maturity or renewal. However, those wishing to earn higher FD interest rates can open fixed deposits in some small finance banks and smaller private sector banks. The fixed deposit interest rates offered by some of these banks are around 200-300 bps higher than those offered by PSU banks and bigger public sector banks.
“All the small finance banks have been granted the status of Scheduled Bank by the RBI. Hence, the fixed deposits opened with these banks too are covered under the deposit insurance program of DICGC, an RBI subsidiary. Under the deposit insurance program, bank deposits of up to Rs 5 lakh per customer opened with scheduled banks, including savings, current, fixed and recurring deposits, are covered from bank failures. Thus, opening fixed deposits with these small finance banks are equally safe as with other scheduled banks, at least when the cumulative bank deposits opened with each of these small finance banks per customer is less than Rs 5 lakh,” says Sahil Arora, Director & Head of Investments, Paisabazaar.com.
FDs Vs Savings Accounts
Looking beyond FDs
Apart from FDs, investors can also explore other instruments after ensuring all their investments are strictly in line with the demands of their financial goals, current income flow, age, risk tolerance and liquidity requirements.
“For risk-averse investors, for instance, some options include small savings schemes (like the PPF and Sukanya Samriddhi Yojana), and the Voluntary Provident Fund. For investors with a moderate to low risk appetite, there are AAA-rated corporate FDs and liquid mutual funds, the latter being a more tax-efficient alternative to FDs. If their horizon is longer – say 5 years or more – they should consider investing in top-rated equity mutual funds through SIPs because these invariably beat FD returns over the long term,” advises Shetty.
Investors with higher risk appetite can also invest in ultra-short duration debt funds for their short-term financial goals. These funds usually generate higher returns than bank fixed deposits. “They are also more tax-efficient than bank fixed deposits for those in the 20% and 30% tax slabs for an investment horizon of 3 years and more,” says Arora.
Whatever be the case, investors should closely analyse the inherent risks associated with each of their chosen investment products before investing in them and aim to optimally diversify their portfolio at this stage. This is the only way to maximize their returns.