'Choose an FD tenure that provides a balance between returns and the horizon for which you can invest.'
Several banks and non-banking financial companies have reduced their fixed-deposit (FD) rates.
Conservative investors and retirees, who rely heavily on FDs, need to refine their strategies in a declining rate environment.
Why FD rates are falling
Liquidity infusion by the Reserve Bank of India has eased funding pressure on banks.
"This surplus liquidity has reduced banks' dependence on high-cost deposits, allowing them to cut rates while maintaining their net interest margin," says Charu Pahuja, group director and chief operating officer, Wise FinServ.
Banks had introduced special FDs to attract deposits.
"Now they are discontinuing them or lowering the rates on them," says Santosh Agarwal, CEO, Paisabazaar.
"The ongoing policy easing by the RBI has also led banks to reduce their lending and deposit rates," says Adhil Shetty, CEO, Bankbazaar.com.
Further decline likely
Deposit rates may go down further.
"Further improvements in liquidity conditions and expected repo rate cuts by the Monetary Policy Committee could encourage banks to reduce their FD rates in the next few months," says Agarwal.
However, the pressure to gather deposits remains.
"The downtrend will be limited as banks are fighting to garner savings from households," says Shweta Rajani, head-mutual funds, Anand Rathi Wealth.
Most reductions are concentrated in short- to medium-term FDs.
"Banks have reduced rates on select tenures, like 35, 36, and 55 months, where the promotional rates were higher," says Pahuja.
Investor strategies
While aiming for the best returns, investors must ensure their liquidity needs are met.
"Choose an FD tenure that provides a balance between returns and the horizon for which you can invest," says Shetty.
Avoid long tenures if you may need the money prematurely.
"Not only do you lose the high interest rate, you also face a penal interest of 50 to 100 basis points," adds Shetty.
Investors unsure of holding periods should ladder FDs based on expected cash flow requirements.
Several small finance banks (SFBs) and private banks still offer returns above 8 per cent.
"Depositors should spread their FDs across high-yield banks, keeping each under Rs 5 lakh to maximise deposit insurance coverage," says Agarwal.
Mohit Gang, co-founder and CEO, Moneyfront, stresses the importance of due diligence before investing with SFBs.
Pahuja emphasises monitoring the SFB's financial health so that safety is not compromised.
Returns vary across lenders for different tenures due to differences in their asset-liability management (ALM).
"Opening FDs with multiple scheduled banks can help depositors ladder them across multiple maturities, reducing reinvestment risk," says Agarwal.
Gang notes that FDs maturing in two to three years currently offer competitive rates.
For goals beyond three years, investors must consider the returns they could earn from hybrid or equity funds though they will not offer fixed returns.
Rajani recommends arbitrage funds for those in higher tax brackets: They combine low volatility with equity-like tax treatment.
Gang suggests that investors also incorporate products like corporate FDs, corporate and government bonds, Public Provident Fund, Senior Citizens Savings Scheme, and National Pension System, depending on their horizon and risk appetite.
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Feature Presentation: Ashish Narsale/Rediff.com
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