With deposit rates at a two-year high, it could be a good time to invest.
Retiree Birendra Tiwari sees the recent increase in fixed deposit rates as a godsend. “State Bank of India (SBI) is offering nine per cent for 555 days. And, if I invest for five years, the rate will be 8.75 per cent, along with 80C benefits,” he says.
The recent spike in the interest rates has got many interested, especially the risk-averse. At present, the highest rate is 9.25 per cent — the highest in the last two years.
SBI increased its deposit rates by 50-150 basis points across tenures in December. The latest rates are quite impressive: 7.75 per cent up to one year and nine per cent for 555 days and 1,000 days, respectively. Similarly, IDBI Bank has increased its deposit rates by 25-75 basis points. One-year rates are up to eight per cent, and for 500, 1,000 and 1,100 days, the rates stand at nine and 9.25 per cent. Private sector lender HDFC Bank has announced an increase in deposit rates by up to 125 basis points on different maturities. The bank is offering the highest rate of nine per cent for over two years.
It may seem an appropriate time to get locked into long-term bank deposits. But financial planners think otherwise. “We are advising fixed deposits for six months to a year, and only to those who do not have a specific goal as of now. They can lock their money in the interim and earn good returns,” says Kartik Jhaveri of Transcend Consulting.
Others who have major expenses coming their way in the next few years, such as providing for the downpayment of a car or property, may lock the money in term deposits, adds Jhaveri.
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For someone like Tiwari, it is an ideal deal. His retirement corpus of a lump sum of Rs 26 lakh can be locked into fixed deposits. Since his immediate priorities are his first daughter’s marriage in the next one year, and funding for his second daughter’s higher education in the next six months, he cannot afford to invest in riskier instruments.
“He must invest 15-20 per cent of his corpus in fixed deposits, as two important goals are only six months to one year away,” says Pankaj Mathpal, a certified financial planner. The cushion for Tiwari is that his wife will be earning a regular income for the next seven years. His other priority is a retirement corpus for his wife and himself.
So, he needs to mostly diversify within the debt space. His options are fixed deposits, fixed maturity plans (FMPs) of mutual funds and senior citizen saving schemes. His equity exposure should not be more than 20-30 per cent, that too, strictly in equity-diversified schemes.
Forty-year-old Shushobhan Pal, whose immediate priority is buying a house in the next five years, should ideally avoid debt products such as fixed deposits, as equities give maximum returns in the long term. But for safety and liquidity, experts suggest he can put up to 10 per cent in fixed deposits for five years.
| HOW THEY ARE FARING | |||
| Birendra Tiwari | Shushobhan Pal | Ankur Vyas | |
| Age | 60 | 40 | 25 |
| Investible amt (Rs ) | 26 lakh | 1 lakh | 20,000 |
| Salary (Rs ) | — | 80,000 | 20,000 |
| Spouse’s salary (Rs ) | 20,000 | 10,000 | — |
| Priorities | Daughters’ marriage, education and building a corpus for retirement | Children’s education and buying a house | Wealth creation |
| Advice | Invest 15-20% in FDs | Up to 10% in FDs | Invest in FD only if you have created an emergency kitty |
It is because he falls under the highest tax bracket (gross salary = Rs 80,000 a month) of 30 per cent. And, fixed deposits of five years and above provide tax benefit. In case he needs some money in the interim, he can terminate the deposit for a penalty of 0.5-1 per cent. The other option is to lock his wife’s income in fixed deposits. His wife is a freelancer and earns in bulk, but not regularly.
“If someone in Pal’s position cannot lock his/her money for five years, an FMP is good option, as it is more tax-efficient,” says Mathpal. An individual is taxed 10 per cent without indexation and 20 per cent with indexation.
But remember, FMPs have a risk element. These invest in corporate papers, which can cause trouble in bad times.
And, if you are young such as 25-year-old Ankur Vyas, who does not have any responsibility and wants to create wealth starting with Rs 20,000 saved over seven months, don’t bother with fixed deposits unless you have still not created an emergency kitty (salary of six months).