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Worried about falling interest rates!

  August 6,2019

Worried about the fall in FD rate? Here are four alternatives


The interest rate offered by fixed deposits were already moving south, and major banks have yet again cut their FD interest rates.

Banks like SBI, HDFC Bank and Kotak Mahindra Bank have cut their FD interest rates. SBI has sharply reduced the interest rate on fixed deposits between from 45 days to 10 years by 50-75 basis points.

This rate cut comes on the back of the cut in the repo cut by the Reserve Bank of India(RBI). RBI has cut interest by 75 basis points since January 2019. One basis point or bps is one hundred of a per cent.

Fixed deposits are ‘the’ favourite saving avenue of Indians. And, now the fall in the FD interest rate has hit FD customers, especially for retired and people who are near their retirement. As a result, it has become the need of the hour to look at better alternatives to bank FDs.

Here are some of the investment options that may help you in the current scenario.

Small finance banks FDs

Smaller finance banks offer higher interest rates than bank FDs. These banks have a regional presence and may not have pan India presence like major banks. Small banks rely on deposits from customers to expand their loan book. As a result, unlike these banks offer higher interest to attract customers. E.g., Jana Bank offers an interest rate of 8.50% on their one-year deposits while the current rate one-year FD of SBI is 6.80%.

Many people fear to park their money with these banks. However, the deposits of up to Rs.1 lakh in these banks are insured. This is similar to other big banks. It is better to do a little bit of background check before opening FD in these banks.

Post office time deposits

The interest offered by the post office on their time deposits is a tad higher than bank FDs.  E.g. the interest rate of 1 to 3 years PO time deposits is 6.90%, which is higher than the rate given by major banks. For 5-year FDs, the post office is offering 7.7% while SBI FD is giving 6.5% per annum.  Also, post office saving deposits carried with a sovereign guarantee on both capital and interest earned. While bank FDs change their rates as and when it seems fit, post office FDs are revised every quarter.

 FDs issued by companies or non-banking finance companies

Many non-banking finance companies and other companies also offer attractive interest rates on their FDs. These company FDs give 1-3% higher than bank FDs. However, the higher interest rate comes with higher risk. Company FDs are not insured and hence carry default risk. In case the company runs into trouble, and the company is not able to pay the principal and interest, it will be hard to get your money back. Hence, do your due diligence or seek help from your financial advisor. 

Debt funds

In the last few months, debt funds have been news for several reasons. The returns have tumbled striking fears in the minds of many investors. Having said that, debt funds is a strong contender among all the alternatives of bank FDs. It is because debt funds can generate higher real returns and are tax effective. Real returns are the returns given by an investment product after subtracting the inflation rate. With bank FD rate at 6.5%  and the inflation rate is 3%, the real rate is just 3.5%. And if you happen to be in the highest tax bracket, the real rate will come down further.

Historically, debt funds have given better returns than bank deposits. Also, debt funds also come with indexation benefits. This means that tax on the gains is based on the inflation rate of the year. Tax is applicable on the gains that have exceeded the inflation. This helps to fetch better real returns. However, it should be noted that fund houses do not assure fixed returns or capital safety. 

These were some of the investment options available to you. Your financial advisor will be able to help you to select the right choice.