Over the last one year when interest rates have fallen dramatically there has been nothing but dissatisfaction among investors searching for healthier fixed income investment alternatives. As the new rates are considerably lower than those a few years ago, those who wish to secure long-term deposits for five years or more are facing a serious concern now. Many leading banks only provide the interest rate on their fixed deposits at about 5 to 6 percent as of now. If we take an example then SBI is currently providing an interest rate of 5.4 per cent to the general public and 6.2 per cent to senior citizens, HDFC Bank having an interest rate of 5.5 per cent to 6.25 per cent only.
Whereas ICICI Bank will only fetch you an interest rate of 5.5 per cent to 6.3 per cent on 5 to 10 years of fixed deposit. Some recommend opting for the strongest long-term returns offered now from high rated corporate FDs, while others prefer to wait for interest rates to increase again for a short-term period of one to two years to park their deposits. There is, however, no guarantee that the interest rate will go up dramatically a few years down the road. And what are investors supposed to do to secure themselves from lacking credibility in their deposits?
Should I Wait For FD Rates To Move Up?
Patterns in interest rates are impossible to forecast. Nevertheless, one can still take some confirmation from the long-term patterns. The repo rate has fallen to the lowest level of 4 per cent currently and at this point the odds of any major rate reduction are very poor. It does not imply, though, that the rates will rise though. Generally, India's interest rates have not stayed stable for a long time, but the RBI can accept the present predicament and aim to keep interest rates low for a longer period of time. In the near-term, the restoration of the higher interest rate environment does not seem inevitable.
The RBI has a large workload; inflation in the short term has taken a knock and inflation has increased at the same time. The central bank has a fragile string on which to manoeuvre, but interest rates are unlikely to rise dramatically higher anytime in the near future. The resurgence of a persistent rising interest pattern will rely largely on business growth, which will rely on the capability of the world to address the coronavirus outbreak. So, without the guarantee of a high interest rate at the end of the path, there could be a longer pause.
Where Should I Invest Amid Low FD Rates?
Until interest rates escalate again, it will take a while. So, at the present low rate, should you hesitate while locking in a long-term deposit? It will be the best thing to do in the present situation to wait for some time before investing in long-term fixed deposits. As the current interest rate of 7.4 percent and 8.3 percent will be locked-in for maximum tenure, it is also safer to go for SCSS (Senior Citizens Savings Scheme) and PMVVY (Pradhan Mantri Vaya Vandana Yojana) as these investments have even better historical returns. If you plan to wait, you'll have to hold your deposit in the interim to gain a better return.
Usually, one must invest in short-term FDs and not hold their investment in long-term products, because it is smarter to lock investment in long-term alternatives as the interest rate rises in the future. Does it make reasonable to miss out on the current best rate because nobody seems sure how long the period will be and how high the interest rate will go? If you don't opt for the best current rates, you're going to keep missing out till you wait. So, opting for the existing best rates makes smarter sense as we don't know actually when the rates of FD will go up.
Long Term Investment Plans
|Long Term Investment Options||ROI|
|Corporate FDs||Up to 9%|
|Pradhan Mantri Vaya Vandana Yojana||8.30%|
|Small Finance Bank FDs||Up to 8%|
|Sukanya Samriddhi Account||7.60%|
|Senior Citizens Savings Scheme||7.40%|
|RBL Floating Rate Bond||7.15%|
|Public Provident Fund||7.10%|
Which Can Be The Best Bet For Me Now?
For long-term floating rate investments such as the Public Provident Fund (PPF), Sukanya Samriddhi Account (SSA) and the RBI floating rate bond are the smarter choice to consider now. You can use small savings schemes if you have a long-term horizon and are willing to invest to achieve big goals of your life. With a current interest rate of 7.1 per cent and 7.6 per cent both PPF and SSY can be the best bet for you as they are backed by the government and thus generate assured returns. Making headway, you can get the advantage of the rate increase when there is an adjustment in the interest rate. If you do not have a long-term horizon, though, you can consider the RBI Floating Rate Bonds, which currently deliver a better interest rate of 7.15%.
This vehicle comes with a tenure of 7 years, and you can start investing with a minimum amount of Rs 1000. Whereas this bond is currently fetching higher returns of 0.35 per cent above than National Savings Certificate (NSC) which currently give you an interest rate of 6.8 per cent only. As they are released by the Government of India, these bonds are of the finest creditworthiness. If you are below 60 years of age, there are no premature withdrawals permitted. Floating rate savings bonds are the perfect choice if you are willing to stay active until the bond matures.
How Should I Deal With Fixed Deposits Now?
Investors may be compelled to receive higher interest rates and are prepared to take any uncertainty. In such a situation, the best choice might be to lock in some portion of the deposit against long-term stable alternatives such as post office savings schemes and the rest in small finance bank FDs or high rates corporate FDs. For instance currently Suryoday Small Finance Bank and North East Small Finance Bank are giving a higher interest rate of 7.5 per cent to the general public and 8 per cent to senior citizens. Whereas there are some high rated corporates such as Hawkins, Shriram City Union Finance, Shriram Transport Finance, HUDCO and so on which are currently fetching an interest rate up to 9% on their FDs.
You must not, though, be influenced by the higher rate of interest. The higher the interest rate, the stronger the risk. Considering that small finance banks, unlike regular nationalised banks, are not well established, it is recommended that you restrict your attention to these banks considering the emerging debt market crisis. But if you have decided to go for FDs with a small finance bank only for the higher interest rate you must first deposit a small amount. Please ensure the maturity amount in a bank is less than Rs 5 lakh so that both the principal and the interest are secured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). Even though there is insurance coverage, if the bank goes bankrupt, it will still be difficult to recover your money. It can take years for capital to be credited to the depositor when a bank goes to bankruptcy. Before investing their hard-earned money in small finance bank fds or corporate fds, investors should do thorough research first.