Since the Repo Rate hike by the Reserve Bank Of India (RBI), the banking sector is witnessing a rapid hike in the interest rate on FDs. Over a couple of weeks, major banks like SBI, Bank Of Baroda, Kotak Mahindra Bank, IndusInd Bank, HDFC Bank, PNB and various other banks including several NBFCs have revised or hiked their FD rates on various tenure. It is expected that more banks may also hike interest rates. With the fixed deposit interest rates rising again, what could FD investors do to improve their returns in light of the most recent RBI repo rate increase? Let's look at some options to enhance the return on FDs.
Short-term deposit rates
It has been observed that short and medium-term FD interest rates react to rate changes more quickly than long-term FD interest rates when the interest rate cycle reverses back after bottoming out. You can switch to a higher FD rate by investing in FDs with a short or medium-term maturity. Short to medium-term fixed-rate interest rates typically increase first whenever interest rates start to rise. Investing in the short-term or medium-term FD can help you improve your FD returns.
Avoid making long-term FD investments
When you renew your current FD or make investments in a new FD, it will be preferable to choose shorter-term deposits. You can avoid putting your money up for a long time and take advantage of interest rate increases when they occur by choosing shorter-term deposits, like those of a year or less, in the current market.
Avoid low returns by using the FD ladder approach
In spite of the possibility of an interest rate increase due to the current market situation, FD laddering is a great way to guarantee a good return on investment. By distributing your lump sum cash among various FDs with various maturities, you can create your own FD laddering plan.
One large FD is divided into smaller, tenure-varying FDs to form an FD ladder. If you already have an FD, suppose Rs. 5 lakh FD, you may split it into 5 equal portions and book 5 FDs of Rs. 1 lakh each, each with a different tenure of 1 year, 2 years, 3 years, 4 years, and 5 years. After a year, extend the term of the FD for an additional five years. Your FD with a two-year term will mature after two years, at which point you can renew it for another five years. Your ladder will be prepared when you perform this exercise every year.
By utilising the FD ladder strategy, you'll prevent all of your deposits from being locked in at the same time at the lowest interest rate and ensure that your average return is on the higher side.
Utilize floating rate options
Floating FDs are a great way to enhance your ROI on FDs. Featuring FDs allows investors to avoid locking money for a long period with less FD rates. Under this FD scheme, investors can invest in FDs without worrying about the Repo rate hike because floating FD Rates are linked to the repo rate, and the interest rates are determined by changes in the repro rate. So, as the overall interest rate environment shifts and rates begin to rise, depositors will truly profit from a floating rate FD because the interest rate on these FDs would also rise.
You shouldn't wait for a rate increase before investing in FDs because it's uncertain when the rate will increase and there's a potential it could happen more than once as it happened in the last 2 months after continuous two Repo Rate hike by RBI. You won't receive the return on your corpus until you invest. To make the most out of your FD investment, use these strategies.