Banks Fixed Deposit Rates Lowest In Many Years. What Are Your Options?
Today the interest rates on bank fixed deposits are at multi-year lows. For example, State Bank of India is offering interest rate between 5.50 per cent and 6.90 per cent across different maturities on retail deposits (below Rs. 1 crore), according to its website.
Though the Reserve Bank of India has held its repo rate steady for some time, the 175-basis-point cut in its key lending rate since January 2015 has led to a broad decline in overall interest rate in the financial system. And the surge in deposits after demonetisation has forced banks to bring down interest rates on fixed deposits.
“With bank fixed deposits at around 7 per cent and offering a post-tax return of 5-7 per cent depending on one’s tax slab, clearly for people in higher tax slab this will only help them match inflation and be at best a value protector,” says Manoj Nagpal, CEO, Outlook Asia Capital. But conservative investors should maintain their asset allocation based on their risk profile, he said.
Some newer private banks offer higher rates, Mr Nagpal added.
“Given that most asset classes that replace debt like gold, real estate etc have also not been giving returns in the short term, equity seems to be emerging as the only alternative. However investors should not over-allocate to equities just in the chase of higher returns. If being safe is the objective, then one should surely remember that equities are volatile by nature,” he said.
He says small savings schemes like 5-year NSC (National Savings Certificates) offer a superior alternative for investors though with a slightly longer lock-in and could also be considered.
For senior citizens, Mr Nagpal recommends the Senior Citizen Savings Scheme and the to-be-launched Varishtha Pension Bima Yojana from LIC. The Varishtha Pension Bima Yojana 2017 is a pension scheme for senior citizens, which was earlier approved by the Union Cabinet. The Varishtha Pension Bima scheme 2017, which will be implemented through Life Insurance Corporation of India (LIC), assures pension based on a guaranteed rate of return of 8 per cent for 10 years.
Among debt mutual funds, Mr Nagpal suggests accrual funds with a high quality of underlying portfolio for conservative investors. Given that the Reserve Bank of India has once again cautioned on the higher risks to inflation, conservative investors should reduce allocation to long duration debt funds, he added. Accrual funds mainly focus on earning interest income from the coupon offered by underlying bonds while debt funds based on duration try to gain from the upward or downward movement of interest rate in the economy.
Vidya Bala, head of mutual fund research at Fundsindia.com, also says conservative investors should “actively considerer income accrual funds in mutual funds.”
If investors have a shorter time frame, Ms Bala suggests short-term and ultra short-term debt funds. “If they need regular income, they can use systematic withdrawal from short-term debt funds,” she adds.