BT Insight: Should you wait for FD rates to go up or lock in your money now?

The investors looking for safer fixed income investment options have witnessed nothing but disappointment, especially over the last one year when interest rates fell drastically. The ones looking to book deposits for the long-term (five years or more) are in dilemma as the current rates are significantly lower than those a few years ago. Most prominent banks are offering the best rate at 5.5 per cent to general citizens and around 6 per cent to senior citizens.

The problem accentuates for the people whose long-term FDs (five years or more) are maturing now. These FDs were enjoying over 9 per cent interest but are struggling now to find an option to get even 7 per cent. Some consider going for the best long-term rate offered now while others want to wait for interest rates to go up again and park their deposits for a short-term of one to two years for now. However, there is no surety of interest rate going up significantly few years down the line. So, what should investors do to protect themselves from losing interest on their deposits?

 

Will waiting lead to a higher rate?

Interest rate movements are hard to predict. However, one can always derive some clue from the long-term trends. The repo rate has reached to the lowest level of 4 per cent seen in the last two decades. The chances of any significant rate cut at this point are very low. However, it does not mean that the rates will go up then.

"Historically interest rates in India have not remained low for long, but in the current situation, the RBI will tolerate and try to keep interest rates low for some more time. The increase in interest rate is expected to be gradual and slow until consumption and spending improves," says Harshad Chetanwala, Co-Founder, MyWealthGrowth.com.

The revival of higher interest rate regime does not appear imminent in the near-term. "The RBI has a tough job; growth has taken a hit in the short-term and at the same time inflation has moved up. The central bank has a delicate rope to walk on but it's unlikely that interest rates will move sharply higher anytime soon," says Rishad Manekia, Founder and MD, Kairos Capital Private Limited, a Mumbai-based financial planning firm.

The revival of sustainable rising trend in interest will primarily depend on growth of businesses which will depend on world being able to overcome coronavirus pandemic. So, it may be a longer wait without any assurance of high interest rate at the end of the tunnel.

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Should one go for the best being offered now?

It may take a while before interest rates rise again. So, should you wait before locking in long-term deposit at the current low rate? "Waiting for some more time before investing in long-term fixed deposits would be the right thing to do in the current scenario. It is still better to wait for investing in SCSS and PMVYY as current interest rate of 7.4 per cent will get locked for entire tenure and historical interest rates have been higher for these investments too," says Chetanwala of MyWealthGrowth.com.

If you decide to wait up, you will have to park your deposit to earn better rate in the meantime. "Currently one should be investing in the short-term FDs and not lock their investment in long duration instruments, when the interest rate increases in future it is better to lock investment in long term options," says Chetanwala of MyWealthGrowth.com.

As nobody is sure about how long the wait could be and how high the interest rate can go, does it make sense losing out on the current best rate? If you do not go for current best rates you will keep losing out till the time you wait. So, it makes more sense to go for the current best rates.

"We don't know when the rates will go up. If an investor is getting a suitable yield which can help them achieve their financial goals, they may go ahead and invest in that instrument. But, if they will fall short of the corpus to achieve their goals with the current rates, then they can consider investing in other avenues with shorter maturity and reinvest as and when real interest rates improve," says Manekia of Kairos Capital.

Using floating rate products is the best bet

The best option at the time is to go for long-term floating rate products like Public Provident Fund (PPF), Sukanya Samriddhi Account (SSA) and the RBI floating rate bond. If you have a long-term horizon and are saving for big life goals, you can use long-term small saving schemes. PPF is currently giving one of the best interest rate of 7.1 per cent, while interest rate on SSA is 7.6 per cent. Going forward, whenever there is a revision in interest rate you will get the benefit of the rate increase.

However, if you do not have a long-term horizon, you may consider the RBI Floating Rate Bonds which are currently giving one of the highest interest rates of 7.15 per cent and is open to everyone without any investment limit. This bond gives an interest rate 0.35 per cent above the National Savings Certificate (NSC) which is currently at 6.7 per cent. So, whenever NSC rates go up, you would automatically get the higher interest rate.

"These bonds are of the highest credit quality as they are issued by the Government of India. There are no premature withdrawals allowed if you are aged below 60 years, and this is where fixed deposits score better. Also, the interest earned through these bonds is taxable as per your income tax slab. If you are willing to stay invested until the bond matures, the floating rate savings bonds are the best option," says Archit Gupta, Founder and CEO - Cleartax.

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Use limited amount in risky deposit

There could be investors with compulsion to earn higher interest rate and are willing to take some risk. In such a scenario, the best option could be to lock in some part of deposit to long-term safe options like PPF, SCSS, PMVVY for stable interest earning and may invest some part in FDs in small finance banks. For instance, both Suryoday Small Finance Bank and Utkarsh Small Finance Bank are offering best FD rates of 7.5 per cent to general citizens and 8 per cent to senio citizens.

However, you should not get swayed away by the higher interest rate. "Higher the interest rate higher is the risk. Given that small finance banks are not well established like the regular nationalised banks, it's advisable that you limit your exposure towards these banks. There have been instances in the recent past where even the papers of the highest credit quality have defaulted. Given the current crisis in the debt market, it is best to limit exposure to small finance banks," says Gupta Cleartax.

If you have decided to go for FDs in Small Finance Bank, you need to make sure that you invest a small amount. Make sure that your maturity amount is less than Rs 5 lakh in a bank so that both the principal and the interest is covered under the deposit insurance cover of Rs 5 lakh given by Deposit Insurance and Credit Guarantee Corporation (DICGC).

Although there is an insurance cover, but it will still be tedious to reclaim your money if the bank goes bust. "When a bank goes for liquidation it may take years for money to be returned to the depositor. Even though these banks offer higher interest rates, investors should do careful due diligence before investing their hard-earned money," says Gupta.

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