Retirees and senior citizens who rely on bank fixed deposits for their regular income needs will get hurt the most.
The interest rate scenario in the country continues its downtrend. Keeping this in view, SBI has announced a reduction in the interest rates on its term deposits. The new rates will come into effect from September 10. The immediate impact will be felt by depositors who have their existing deposits coming up for renewals soon. Retirees and senior citizens who rely on bank fixed deposits for their regular income needs will get hurt the most. Although bank FDs have low post-tax returns and hardly beat inflation over the long term, they act as capital preservation tool for the retirees.
Here are SBI’s new FD rates:
- On deposits between 180 days to 210 days and on deposits between 211 days to less than 1 year
the rate of interest has been reduced from 6 per cent to 5.8 per cent.
- On deposits between 1 year to less than 2 year, the interest rate will stand reduced from 6.7 per cent to 6.5 per cent.
- On deposits between 2 years to less than 3 years, the interest rate will stand reduced from 6.5 per cent to 6.25 per cent.
- SBI has also cut interest rates on its bulk time deposits by 10-20 bps across tenors.
( Effective September 10, 2019)
With banks lowering fixed deposit interest rates, they would sooner or later ( once FD matures) move their funds into other banks which may still offer them a higher yield, especially the Small Finance Banks. The other avenue left for them are post office small savings schemes such as Time Deposits, PO monthly income account and senior citizens savings scheme.
A better approach for them could be to follow the ‘Laddering’ model of investing in bank fixed deposits. In Laddering, instead of putting the entire sum in a certain term-deposit, the sum is spread across the term deposits of varying maturities. For example, instead of putting Rs 5 lakh in 3-year deposit, one may spread across 1 lakh each in 1-year, 2-year…5-year deposits. This also helps in not breaking the FD in between and pay penalty, if any, to make the use of a rising interest rate scenario.
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By following the Laddering approach, one takes care of re-investment risk, and also lets the funds remain liquid. A higher investment amount can be put into the deposit offering the highest rate. If the investor is able to spread deposits not only across tenures but also across banks, the yield may further rise. Not all banks offer similar returns for the same period of deposit.