NEW DELHI: For the third time in 60 days, India’s largest bank — State Bank of India — has slashed interest rates for fixed deposits, a move that comes into effect on May 12. With others also expected to follow suit, the falling interest rates has become a point of concern, especially for senior citizens who generally park higher amounts in bank FDs.
Speaking to TNIE, sector analysts suggested the best fixed deposit strategies for depositors including holding multiple small deposits, consider small finance banks, restricting the amount to Rs 5 lakh, and avoid chasing higher interest rates as this could risk the capital in the current environment to achieve the right balance between risk and returns.
“If you choose to invest in a fixed deposit, first compare interest rates offered by various banks. Do consider small finance banks as well because interest rates offered by them are usually higher than most large banks. For instance, for a three-year deposit, most small banks are still offering an interest rate of over 7.5 per cent, which is higher than what most large banks are offering today,” said Naveen Kukreja, CEO and co-founder, Paisabazaar.com.
Nishith Baldevdas, a Chennai-based SEBI-registered financial adviser, suggests parking your fixed deposit for a tenure of one-and-a-half to two years in small finance banks by restricting the amount to Rs 5 lakh.
“This would help in maximising return while also taking care of the safety aspect. To get extra returns, you can keep 20-30 per cent of your corpus with banks.”
It may be noted that FDs up to Rs 5 lakh are safe in all scheduled banks, including small finance banks, irrespective of all the turmoil in the banking sector, experts said. “If you want to invest more than Rs 5 lakh, you may diversify the deposits among non-banking financial companies, private and public sector banks, just to be safe, Kukreja added.
“Considering the current situation and the looming recession, lower interest rates should not deter you from continuing investments in small savings schemes to achieve your long-term goals. Even if you have a higher risk appetite, you should consider investing in small savings schemes such as FDs in proportion to the demands of your life goals to keep your capital safe from market-linked risks. Preferably, go with a scheduled commercial bank with lower NPAs so that there is better capital security,” said Adhil Shetty, CEO, Bankbazaar.
For corporate deposits, one can choose AAA-rated options and shouldn’t hesitate about choosing private institutions. “Just like PSUs, private banks also give guarantee of Rs 1 lakh in case of any bank crisis. But go for only highly rated and secure companies,” said Paurush Sabharwal, financial advisor at Sabharwal Investment.
As part of portolio management, many may want to invest in other fixed-income instruments such as debt funds. “But it is not prudent to invest in debt funds now. If investors have a long time frame, it makes more sense to lock into a long-term FD, given the headwinds ahead as interest rates will further go down,” warned Nitin Mathur, co-founder and CEO, Tavaga Advisory Services.
Most importantly, do not disturb the existing FDs as they are likely to be on higher rates. “Instead, you may look at fresh FD durations of around a year as the interest rates cycle may reverse if inflation picks up,” pointed out Rohit Shah, founder, Getting You Rich. Shah also warned that simply chasing higher return could risk the capital in the current environment so you may pay attention towards liquidity of the investment and safety.
What you could do
Invest up to Rs 5 lakh in small finance banks for higher returns
Diversify deposits among public and private banks, and NBFCs, if amount is more than Rs 5 lakh
Don’t disturb an existing FD. Look at fresh FD durations of around a year