Individuals should lock in money for longer tenure bank deposits now to reduce reinvestment risks. The fall in bond yields following the interim Budget will give the Reserve Bank of India the comfort to cut interest rates, and banks in turn, may reduce their deposit rates.
If an investor invests in longer-term fixed deposits now, he can lock in at the current higher interest rates for the entire tenure of the deposit. Among all small finance banks are offering the highest rates for five-year deposits. For instance, Suryoday Small Finance Bank is offering 8.25% for a 5-year tenure, Fincare Small Finance Bank is offering 8%. For senior citizens, the former is offering 50 basis points more to 8.75% and the latter is offering 60 basis points more to 8.6% for the same period.
The interest rates offered by public sector banks for a similar period range between 6% and 6.7% and that of private sector banks between 6% and 7%. State Bank of India is offering 6.5% for a 5-year deposit and Canara Bank is offering 6.7% for the same tenure. Similarly, private sector DCB Bank is offering 7.4% and HDFC Bank is offering 7% for a 5-year tenure deposit.
Look at liquidity needs
For most banks, the interest rates for one-year deposits are higher than that of three- and five-year tenures. Investors can consider short-term deposits to park their surpluses if the interest rates offered are attractive. Adhil Shetty, CEO, Bankbazaar.com, says locking in a fixed deposit now for a longer period will provide a hedge against future rate declines. “However, longer-term fixed deposits may tie up your funds for an extended period. So, consider your liquidity needs and financial goals before committing to a longer tenure.”
Many banks are offering special tenure deposits with higher rates. However, these schemes do not allow premature withdrawal. So, depositors must look at their liquidity requirements before investing in special fixed deposit schemes. Gaurav Aggarwal, chief product officer, Credit Products, Paisabazaar.com, says they should consider bank FDs of longer tenures if they find the yields attractive, preferably of 7.5% and above, and the tenures match their investment horizons.
Diversify FD portfolio
As diversification lowers the risk to your investments, the FD portfolio should be spread across banks and various corporates and across tenures. Investors shoud hold deposits of various maturities, ranging from 180 days to above five years. They must compare the interest rates offered by small finance banks and some private sector banks on their savings accounts. Many of these banks offer savings account rates of up to 7% or even more, depending on the balance maintained.