Why fixed deposits could be the best bet in 2014?

Investment

oi-Sunil

By Sunil Fernandes

Published: Saturday, January 18, 2014, 9:19 [IST]

In 2013, fixed deposit as an asset class beat Nifty returns as well as returns from gold. While investors in gold saw negative returns, the Nifty gained just 6.6 per cent in 2013. Bank fixed deposits pre-tax returns could have generated as much 9-9.5 per cent, while company fixed deposits could have offered more than 10.5 per cent.

In 2014, the equity markets have already near lifetime highs and for the Sensex to gain 10 per cent from here, would mean it has to rally at least till 23,000 points. This looks a little far-fetched no matter what analysts might say. And, markets always tend to defy consensus. Gold on the other hand may not gain much as economic growth around the world would mean investors shift focus to equities from gold.

Now, investors in fixed deposits can get returns around 9.5 per cent in a 1-2 year fixed deposit. Investing in deposits makes sense as interest rates in the economy are set to fall. Firstly, inflation is beginning to fall. WPI inflation for Dec surprised at just 6.16 per cent. What this means is that if inflation keeps falling, the RBI is likely to cut repo rates in the near future. Read more about repo rates here

When the RBI cuts repo rates, the costs for the banking sector is reduced and hence hey may reduce deposit rates. Therefore, in the medium term it is likely that interest rates will fall lower and hence it makes sense to lock into long term FD's today, to hedge against falling interest rates.

If you are looking at fixed deposits then you could probably make it a mix of company fixed deposits and also bank fixed deposits.
Several good company fixed deposits like Mahindra and Mahindra Financial offer interest rates of as much 10.25 per cent. On the other hand good banks can offer one an interest rate of 9.5 per cent, pushing yields higher if one accounts for quarterly compounding.

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