Fixed deposits (FDs) are the most trusted investment avenue for Indians and account for the largest amount of money invested every year.
Fixed deposits (FDs) are the most trusted investment avenue for Indians and account for the largest amount of money invested every year. They are also a very convenient way of investing money with easy access to banks and do not need any additional requirement like opening a demat account, etc.
For banks, FDs provide easy capital at a cheaper rate. So all the scheduled commercial banks try to attract as many customers as possible to raise capital through FDs.
However, the interest rates on FDs vary from bank to bank and tenure to tenure. The following table contains per annum interest rates on FDs for the periods of 1 year and 3 years on investment of less than Rs 1 crore.
According to the above table, LIC Housing Finance, which is a non-banking finance company (NBFC), provides higher interest rates on FDs than banks, with highest rate of 8.25 per cent on 3-year FDs and 8.15 per cent on 1-year FD.
Axis Bank is the only one which offers the higher interest rate on 1-year FDs than 3-year one.
So, apart from Axis Bank, it is better to invest in 3-year FDs rather than rolling the FD after one year.
Even for Axis Bank, it is not sure if the rate will remain the same after one year. So, there will be a re-investment risk involved in rolling the FD after one year. If the rates remain the same or increase after one year, the investor will gain by rolling the FD, but may suffer losses, if the rates fall when the current FD matures after one year.
So, to counter the reinvestment risk, the smart FD strategy would be to invest for a longer period, if the interest rate is better.