How FD investors can enhance returns
Interest rates on fixed deposits (FDs) have been at multi-year lows, with banks and NBFCs having slashed rates over the last two years. However, with the central bank now balancing the scales between economic growth and inflation, things could change, sooner or later. Whenever the interest rate cycle makes a U-turn from the bottom, typically the short to medium-term interest rates rise first. Long-term interest rates take longer to go up. In such a scenario, some smart moves can help FD investors make the best of the situation. Here are 5 ways investors can enhance returns on their FDs.
Long term and low rates are a bad mix
If you are planning to book an FD now or are looking to renew your existing FD, then it will be better to go for a shorter-term deposit, say one year or lower, so that your deposit is not locked at a lower rate for too long. Whenever the short to mid-term rates rise, you can start increasing the tenure of the FD accordingly.
Divide and rule to avoid lowest returns
If your deposit is up for renewal in a scenario when the interest rate cycle is close to its lowest point, you could be deep in financial stress. However, you can avoid this by creating an FD ladder. To do this, just divide one big FD into smaller FDs, and book these for distinct tenures. You can do this in a way such that one FD matures each year.
For instance, if you have a Rs 5 lakh FD, you can divide it into 5 parts and book 5 FDs of different tenures of 1 year, 2 years, 3 years, 4 years, and 5 years. After one year, when the one-year tenure FD matures renew it for 5 years. After two years your FD with 2-year tenure will mature so you can renew it again for the next 5 years. Now repeat this exercise each year and your ladder will be ready. This will ensure that not all of your deposits are locked at the lowest interest rate at the same time and your average return is on the higher side.
Floating rate FDs can help
Many banks and non-banking financial companies have started offering floating rate fixed deposits. The interest rate on such a deposit is linked to a benchmark and the interest rate moves in tandem with the movement in the benchmark rate. These are a good idea if you want to avoid taking any chances against the fluctuating interest rate cycle and want to invest for the long term.
Here’s how this option works
Indian Overseas Bank, for example, offers the floating rate FDs for 3-10 year tenures. It has kept the daily average of the last six months of 5-year G-Sec rate and 10-year G-sec rate as benchmarks for 3-5 years and 5-10 years tenures, respectively. The 10-year G-sec yield on September 24, 2021, as per the data given by RBI, was 6.21%, which is much better than the FD rates of most large banks. If you are not a senior citizen, then the best interest rate that you can get from a big bank will be around 5.25-5.5%. For instance, SBI is offering an interest rate of 5.40% on FD with tenure above 5 years to 10 years.
So, the floating rate option appears to be giving a better interest rate of 6.21% (if the 6 months average is also the same) even in the current scenario. Once the overall interest rate scenario changes and rates start moving up, then depositors will get the real benefit of a floating rate FD as the interest rate on these FDs will also go up
An investment option for non-cumulative deposit
If you are a senior citizen and are looking for an option that gives you a regular income, then you should go for RBI Floating Rate Bonds. This bond is currently giving a return of 7.15% which is higher than bank FDs. It has a tenure of 7 years and pays interest semi-annually. Though senior citizens have better options like SCSS and PMVVY, however, they cannot invest more than Rs 15 lakh each in these two options. So the RBI Floating Rate Bond is a good option for those senior citizens who have exhausted the investment limit in the SCSS and PMVVY.