Fixed deposit interest rates have been steadily moving higher over the last few quarters. With rising crude prices and falling rupee, all indications are that this trend is likely to continue for some more time. This is certainly good news for investors who are risk averse and likely to park their money in fixed deposits.
However, the important question is: Whether one should park money in fixed deposits now or wait for further hardening of the interest rate cycle?
“In my opinion, investors should go ahead and lock their money in fixed deposits with the longest possible duration right away. This of course should be the money not needed for some years and also the part in their asset allocation reserved for fixed return instruments. The reason is that in a rising interest rate scenario, banks usually give higher rates of return on longer-duration deposits,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
He adds that in case you keep the money idle for some time hoping that rising interest rates will offer better opportunities going forward, then money which is lying will earn negligible interest for the interim period. This will more than compensate for the somewhat higher rate deposit that you get later on.
Another factor to be considered is that though interest rates are likely to move higher, but interest on deposits may not necessarily go up in a hurry. Banks usually take a lead time in raising interest rates on their deposits. Therefore, the argument for holding back your fixed deposit allocation in favour of short-term deposits holds true only when the interest rates are at the bottom or have just started moving higher.
“At present they are nowhere near the bottom and have travelled northwards for some distance already. Hence, the present time offers a good opportunity for depositors and they should take advantage of higher interest rate expectations to book deposits for durations as long as possible,” informs Kapur.
Lots of other financial experts also believe that as our economy is in a rising interest rate regime currently, waiting for FD rates to increase further may deprive investors from benefiting from the existing FD rates.
“A phase of an interest rate cycle can last for years and it is very difficult to accurately forecast its peak. Hence, investors with monthly surpluses should keep on deploying them in fixed deposits every month, preferably for 1-1.5 years’ tenure,” says Naveen Kukreja, CEO & Co-founder, Paisabazaar.com.
Also, those with substantial one-time surpluses can partially invest in FDs and park the rest of it in high-yield savings account or liquid funds for later deployment. However, the wait should not be for too long as there is no certainty that the next policy rate hike, if any, would be the last one.
It may be noted that fixed deposit interest rates vary widely, depending on banks and tenors. While major banks are offering highest card rates of 6.85-7.50% per annum currently, smaller banks are offering highest card rates of around 7.5-8.25% p.a. The highest card rates offered by most Small Finance Banks range between 8% and 9% p.a.
“Hence, like all other financial products, investors should first shop for the best FD rates currently available in the market, based on their liquidity requirements and financial goals,” advises Kukreja.
Investment options for short term
According to financial experts, under the current market conditions, investors can also consider ultra-short duration and low-duration debt funds for their short-term goals. That is because while banks penalise the FD holders for premature withdrawals, ultra-short duration funds and most of the low-duration funds do not charge any exit load.
Hence, “these funds offer higher flexibility than that offered by fixed deposits. Moreover, as these funds invest in debt securities of shorter maturities, rising policy rates have minimal impact on their returns. Rising policy rates affect debt funds with longer maturities the most,” says Kukreja.