State Bank of India (SBI), the biggest lender, has further cut interest rates by up to 50 basis points (bps) on fixed deposits (FDs) over two years. Close on it heels, Bank of Baroda and Axis Bank have also cut interest rates on FDs by up to 25 basis points (bps). One per cent is equal to 100 basis points.
Now, a two-three year deposit with SBI will fetch you an interest rate of 6.25 per cent instead of 6.75 per cent while over three year deposits will fetch you an interest rate of 6.50 per cent instead of 6.25 per cent. These rates are for deposits of less than Rs one crore.
Interest rates have been going downhill since January 2015. Also, demonetisation led to a flush of liquidity with the banks. Excess liquidity and poor credit offtake, has led to banks reducing the deposit rates to protect their interest margins. Also, increasing the lending rates by the banks to improve the margins will not be that easy. Lowering interest rates leads to reinvestment risk for those whose fixed deposits are maturing. With inflation hovering around five per cent, the real rate of return may look positive for now but post tax it will be in negative.Investors looking for debt investment alternatives to park their money can look at the following options. 1) FDs with small finance or smaller banks: Most investors prefer fixed deposits over any other instrument for safety and guarantee of capital as well as return. So, an investor can consider FDs offered by small finance and newer banks offering higher return. Ujjivan Small Finance Bank is offering an interest rate of 8 per cent on one-two year deposits. Equitas Small Finance Bank is offering an interest of 7.25 per cent on one-three years. Also, some of the smaller banks, such as RBL bank and DBS Bank, are offering higher interest rates compared to their bigger counterparts. But remember that bank fixed deposits interest is fully taxable and will be taxed as per the individual's slab.
Experts alos suggest that apart from rate of interestthere should be some other things that you should keep in mind while investingin these banks. "High interest rate will surely be the prime concern. Andundoubtedly these banks will be the ideal spot to meet the requirement. Butpeople thinking about safety and security of the deposit may averse to investhere. Whether it is a small bank or larger one, the FD investments arerelatively secured and bear less risk. So this should not be the reason to rejectit. However, the customers must follow certain tips before opening an FD at thesmall banks," Rishi Mehra, CEO of Wishfin.com
2) Debt mutual funds: But if you are looking for better tax efficient returns and willing to take some amount of risk then you can also opt for debt mutual funds with shorter maturities. Debt funds tend to benefit from falling interest rate scenario and that is why over the past two years they have delivered double-digit return. Although debt funds may not deliver double -digit returns this year but investors, especially those in highest tax bracket, can look for short-term and ultra short-term funds depending on their investment tenure as an alternative to FDs as they have the ability to deliver higher than FD returns. Debt funds are also tax efficient than FDs over long-term as indexation benefit is available on the long-term capital gains incurred after three years. Indexation benefit adjust the gains to price rise hence reducing the tax considerably.
3) Small savings schemes: If you are looking for an alternative for long-term, there are small saving scheme such as public provident fund (PPF) where the interest rate is at 7.9 per cent and is completely tax-free. Infact, you can also avail a deduction of up to 1.5 lakh on the investment done for the year. Another small savings scheme, National Savings Certificate, is offering an interest rate of 7.9 per cent where the lock-in period is five years and interest is completely taxable.