The recent surge in fixed deposit (FD) rates has led investors rethink their fixed income investment strategies whether to park their money or withdraw at the higher rate and redeploy the amount for a longer term. There will be many questions in the minds of investors right now as we have been witnessing a rise in interest rates.
Some banks have already increased the FD rates while others might follow suit. Also, FDs have many options and investors must know to use them for their benefits. For example, special FDs are ones that give higher returns on your investment. You can maximise returns and safeguard investments by taking the right steps. Here are some tips to help you decide what to do when FD rates go up.
Understand Your Money Needs
Before making any investment decisions, it’s crucial to revisit and reassess your financial goals. Consider short-term and long-term objectives, such as buying a home, funding education, or planning for retirement. Understanding your goals will help determine the appropriate investment horizon and risk tolerance.
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Compare Current FD Rates
Keep a close eye on prevailing FD rates offered by various banks and financial institutions. In a rising rate environment, comparing rates becomes even more critical. Look for institutions offering competitive rates while ensuring their credibility and reliability.
Lock-in Period
Before investing in FDs, be mindful of the lock-in period associated with the chosen tenure. If interest rates are expected to rise further, opting for shorter tenure FDs may be prudent. This strategy allows you to reinvest at higher rates when the current FD matures.
Explore Special FDs
Banks often introduce special FD schemes with higher rates to attract investors. Keep an eye on such offerings, but be sure to thoroughly understand the terms and conditions. Some schemes may have specific criteria or restrictions that may not align with your investment goals.
Ladder Your FDs
You can also consider implementing an FD laddering strategy. This involves distributing your investment across multiple FDs with varying tenures. As each FD matures, you can reinvest at the prevailing higher rates, maximising returns while maintaining liquidity.
Rebalance Periodically
Regularly review your investment portfolio and make adjustments as needed. If interest rates continue to rise, you may want to shift a portion of your investments towards instruments that benefit from higher rates. Periodic rebalancing ensures your portfolio remains aligned with your financial objectives.
Inflation Risk
While focusing on FDs, it’s crucial to consider the impact of inflation on real returns. Inflation erodes the purchasing power of money, and conservative investments like FDs may not always keep pace. Explore inflation-adjusted investment options to preserve the value of your wealth over time.
Adhil Shetty, CEO, Bankbazaar.com, says, “While FDs offer stability and security, it’s essential to diversify your investment portfolio to optimise returns. Consider allocating a portion of your funds to other investment avenues such as mutual funds, stocks, or government bonds. Diversification helps mitigate risks and ensures a balanced investment strategy.”
Whether you’re a seasoned investor or just starting, adapting to changing market conditions is key to building a successful investment portfolio. When FD rates rise, it is the right time to deploy the best strategy available to grow your funds.