Avoid Investing In FDs With Long Maturity Periods

Business

oi-Sunil Fernandes

By Sunil Fernandes

Published: Monday, October 23, 2017, 8:45 [IST]

If you are looking to invest in Fixed Deposits now, we suggest that you do not go with a longer tenure. This is because it is possible that interest rates are likely to rise from hereon. What this means is that if you invest for a 5-year tenure at 7 per cent and than interest rates rise, you are stuck.

If you want to withdraw your deposit and reinvest at higher rates, you could lose as much as one per cent for breaking your FD before maturity. Here are some reasons why interest rates are likely to rise.

Inflation likely to rise

With fuel prices gradually rising and inflation edging higher, there is a possibility that inflation could touch 4.5 per cent by the end of the last quarter. This would be over and above the Reserve Bank of India's targeted level of 4 per cent. Even a slight deterioration would mean the RBI would not be reluctant to raise interest rates. This means you would get higher rates for your FD in the near future than what they are right now.

Rise in 10 year GSec

The 10 year GSec could go well past the 7 per cent. When this happens we could also see bond prices dropping. Remember, bond yields and prices are inversely related. When one falls the other gains and vice versa.

Interestingly, in the last Monetary Policy Review, we had one member of the MPC suggest that they would not be averse to raising rates as per the Minutes of the meeting.

"I... vote for status quo, but only as long as inflation readings stay within the target of 4%. It is time to be in readiness to raise the policy rate to quell the underlying drivers of inflation if they strengthen further," said Michael Patra, an MOC member states.

All in all, we suggest that you go for a shorter duration of FDs, at most one year.

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