The dramatic drop in the rate of fixed bank deposits and increasing retail inflation have affected risk-averse investors, particularly senior citizens. For instance, the largest lender in the country, State Bank of India, provides an interest rate of just 4.9 per cent for a tenure starting from one year to less than two years. The current pace is negative at 2.71 per cent, as retail inflation (CPI) was 7.61 per cent in October. The effective rates are going to sink lower to negative 4.24 per cent after-tax (at 31.2 per cent).
Though interest rates provided by most banks for a maturity period of one year are around 5 per cent, there are some who provide better rates of 6.5 per cent for the similar-maturity term. The rates differ because, relative to those banks which are not labelled very secure, lenders who are deemed safe can increase deposits even at lower interest rates. To attract deposits from customers, the latter will have to provide higher rates.
Check the below table for the Rate of interest
|Sr No.||Banks||1 Year||1 to 2 year||2 to 3 Year||3 to 5 Year|
|2||Bank of Baroda||4.4||5||5.1||5.25|
|3||Punjab National Bank||4.5||5.2||5.2||5.25|
|7||Kotak Mahindra Bank||4.5||4.75||4.75||4.75|
|8||Ujjivan Small Finance Bank||5.2||6.5||6.05||5.8|
|9||AU Small Finance Bank||5.5||6.5||6.75||6.5|
The maturity period of fixed deposits
Because of guaranteed returns, high liquidity and convenience of investment, investors mostly favour fixed deposits. Hence, many investors tend to invest in FDs with a higher term of five to 10 years in order to cut reinvestment uncertainties. Investors should, though, invest for three or four years in the current scenario and prevent the duration of one to two years. Interest rates on bank deposits may have been reduced and are expected to continue for a while at these rates until inflation retrieves.
Considering the same, risk-averse depositors must consider small savings schemes of post office such as 5-year National Savings Certificates currently offering 6.8 per cent interest rate; 5-year Monthly Income Scheme (6.6 per cent); Kisan Vikas Patra (6.9 per cent) or a 5-year post office fixed deposit with a return of 6.7% respectively. In addition, the rate of post office term deposits throughout all tenures is higher than bank deposits and also provide tax benefits too.
A glance at Corporate Deposits
Although investing in corporate deposits that give interest rates between 150 and 250 basis points higher than bank deposits can be enticing, depositors must take into consideration the risk of default on the principal amount and interest payouts. Currently, Bajaj Finserv provides 6.6 per cent interest rate on three-year corporate deposits, similarly 6.3 per cent by Mahindra Finance and 8.15 per cent by Shriram Transport Finance Corp. As we all know that corporate FDs are unsecured loans which imply that repayment of principal and interest are not assured and even not covered by DICGC. So before investing in any corporate deposits for better returns, an investor must consider the ratings first.
Banks promising higher interest rates can be looked at by investors ready to bear some risk. They must take into consideration some factors such as the limit on withdrawals, as was the experience with Yes Bank, which was placed under a moratorium and for some time a substantial portion of the deposits remained unreachable. It's smarter to opt with safer banks if you're not happy taking on these risk factors.