If safety's on your mind, consider fixed deposits

High safety and high liquidity. These two features of the venerable old bank deposit have made their way to the centre of consciousness all over again. Throw in another feature - "reasonably good returns" - and anyone nauseated by stock market volatility will make a grab for it.

At times like this, the fixed deposit suggests itself. This plain vanilla option had lost its appeal after the interest rate tumble some years ago that brought the returns perilously close to inflation.

Now, however, there has been a minor uptick, making it a little more likely that the rupee you get after the fixed term is over can buy as much as it did when you made the deposit.

For deposits of three-to-six months maturity, most banks are offering an annual interest rate of 5-6 per cent. A term deposit of 91-180 days with ICICI Bank or HDFC Bank earns interest at 5.5 per cent per annum, while Bank of India offers 5.75 per cent for the same. State Bank of India offers 5 per cent per annum on a fixed deposit of duration 46-179 days.

Now, bank deposit interest rates above Rs 5,000 per annum qualify for tax deduction at source, so, if you're in the 30-per cent income tax bracket, your 6 per cent would amount to a mere 4.2 per cent per annum. Not terribly exciting, is it?

The Union Budget this year has offered tax incentives for deposits over five-year maturity. Some banks have started offering good rates too.

BoI, for example, offers 8 per cent for 8-10 year deposits. If you're a senior citizen, you get an even higher - 9 per cent - rate on the BoI long-term deposits.

With another nudge from the government, such deposits might start attracting savers in larger numbers.

Says an official with a public sector bank, "More tax benefits need to be provided for term deposits to be considered an attractive investment option. However, at this point, investors are finding bank deposits attractive even though the returns are barely inflation neutral, as the equity market has turned uncertain."

Another manager at a nationalised bank suggests a sum of at least Rs 50,000 invested in a term deposit, since "interest income up to Rs 5000 per annum is tax exempt".

Ideally, every investor should have diverse holdings of assets, including safe deposits. "Deposits are an integral part of asset allocation," says Abhay Aima, head, wealth management, HDFC Bank.

With the Sensex in yo-yo mode, you may be tempted to opt for such safety. But, remember, that's no replacement for a personal investment portfolio strategy that allocates your money with risks pre-calculated to ensure you don't lurch from asset to asset, buffetted by short-term shifts.