The Reserve Bank of India’s (RBI) rate hikes have boosted interest rates for fixed deposits (FDs) that were near multi-year lows in the last few years as the banking regulator pushed liquidity in the system. With the interest rate cycle reversed and the RBI Monetary Policy Committee's (MPC) August policy decision set to raise rates, the banks may further increase deposit rates.
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A relatively risk-free instrument, FDs generally become attractive in higher interest rate regimes. For instance — in the last two policies, the central bank hiked the repo rate by 90 basis points and consequently deposit rates were increased by the banks.
Leading banks are now offering up to 6 percent interest on FDs of longer tenures. Compare this to the mere 8 percent return by broader NSE Nifty50 index so far this year.
That said, investors should be mindful that the returns on FDs after factoring in inflation and tax remain negative compared to a relatively safer debt fund, Abhinav Angirish, Founder, Investonline.in told CNBC-TV18.com.
To put it into perspective, Angirish explained it with an example.
"Suppose, Mr X parks Rs 10,00,000 in for five years, and assuming 6 percent returns, after five years the corpus turns out to be Rs 13,51,000.00. Assuming Mr X is in the higher tax bracket the post-tax returns for FD is Rs 2,32,699 while that of debt fund is Rs 3,37,315," Angirish added.
Here are the latest FD rates offered by different banks:
| Name of Bank | For General Citizens (p.a.) | For Senior Citizens (p.a) |
| State Bank of India | 2.90% to 5.50% | 3.40% to 6.30% |
| HDFC Bank | 2.75% to 5.75% | 3.25% to 6.50% |
| Kotak Mahindra Bank | 2.50% to 5.90% | 3.00% to 6.40% |
| Punjab National Bank | 3.00% to 5.60% | 3.50% to 6.10% |
| Canara Bank | 2.90% to 5.75% | 2.90% to 6.25% |
| Axis Bank | 2.50% to 5.75% | 2.50% to 6.50% |
The only plus side of FD, Angirish said, is that the danger of default is minimal. But debt funds are safe too.
Debt funds also offer indexation benefits that help lower the tax rate thereby resulting in a higher rate of post-tax returns.
Not just these, an investor needs to factor in other conditions as well before investing in FDs.
"If an investor needs money after 3 years than FDs will attract penalty for premature withdrawal whereas there is no such restrictions with a debt fund. One can withdraw from debt funds anytime he/she wishes. Those who have been investing in SIPs should continue with it regardless of returns," Angirish added.
People invest in equities for a particular reason and for a particular time horizon. So, when should investors go for FDs?
According to Angirish, when investors are nearing their financial goal, they should think of withdrawing money from equities and parking it in FDs. It's important to note that equities have outperformed other asset classes in the long run.
Additionally, even after the recent interest rate increase, FD rates are not very lucrative now as it is still not at par with the rates that were enjoyed a few years ago. However, one cannot rule out the importance of fixed deposits as an emergency fund, Adhil Shetty, CEO, Bankbazaar said.
“FDs are viable for short-term capital protection, such as in case of parking emergency funds. As interest rates are on an upward track, it is best to ladder investments and invest them for shorter periods so that investors can reinvest them on maturity to get higher returns," he explained.
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