The sharp fall in bank fixed deposits rates and rising retail inflation is hurting risk-averse investors, especially the retired people. The country’s largest lender, State Bank of India, is offering an interest rate of 4.9% for tenure of one year to less than two years, for example. As retail inflation (CPI) was 7.61% in October, the real rate is negative 2.71%. Post-tax (at 31.2%), the real rates will fall further to negative 4.24%.
So, what should investors do as the value of their fixed deposits erodes? Some are investing in stocks or equity mutual funds. However, equity funds have reported outflow for the fifth consecutive month in November because of profit booking. Investors are looking at open-ended debt funds and short-duration and corporate bond funds are gaining traction. Higher rates by some banks.
While interest rates offered by most banks are around 5% for tenure of one year, there are some who are offering higher rates of 6.5% for similar tenure. The rates vary because lenders that are considered safe can raise deposits even at lower interest rates as compared with those banks that are not considered very safe. The latter will have to offer higher rates to garner deposits from the public.
Experts say investors who are willing to take on some risk can look at banks offering higher interest rates. They have to keep in mind the risks such as cap on withdrawals as was the case with Yes Bank which was put under a moratorium and a large part of the deposits remained inaccessible for some time. If you are not comfortable taking on these risks, better go for safer banks.
Tenure of fixed deposits
Investors prefer fixed deposits because of assured returns, high liquidity and ease of investment. So, in order to cut reinvestment risks, many depositors prefer to invest in FDs of higher tenure of five to 10 years. However, in the current scenario depositors should invest for three to four years and avoid tenures of one to two years.
Experts say bank deposits rates may have bottomed and are likely to remain at these levels for a while till growth picks up. Risk-averse investors should look at small savings schemes like 5-year National Savings Certificates which currently offer 6.8% interest rate; post office 5-year Monthly Income scheme (6.6%); Kisan Vikas Patra (6.9%) or a 5-year post office fixed deposit at 6.7%. In fact, post office term deposits rates are higher than bank deposits across all tenures.
While it may be tempting to invest in company deposits which offer 150 to 250 basis points higher interest rates than bank deposits, depositors must consider risks of default on payment of interest and even the principal amount. For three year corporate deposits, Bajaj Finserv is offering 6.6%, Mahindra Finance 6.3% and Shriram Transport Finance Corp 8.15%.Company fixed deposits are unsecured loans, where repayment of principal and interest are not guaranteed. In case of any default or delay, investors have little recourse as is the case with DHFL. So, an investor must understand all the risks before investing in any company deposits for higher returns.
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