 "Choosing a fixed-rate instrument gets tougher")
Investing in fixed-income instruments has been relatively easy in the past. With certain instruments, such as post office deposits, offering relatively higher rates than most banks, it has been a no-brainer for the investor in traditional instruments.
Things are going to change soon. From April 1, rates of small savings schemes will witness a deep cut, ranging from 60 to 130 basis points. Small savings schemes include Public Provident Fund (PPF), National Savings Schemes (NSC), Kisan Vikas Patra (KVP), Senior Citizens Savings Scheme, Sukanya Samriddhi Scheme, Post Office Fixed Deposits and monthly income schemes. This means there will be considerable competition between bank FDs, post office FDs and other instruments.
Investors in these instruments will now have to do more research to get the best rate. For shorter-term instruments, between one and three years, the rates are quite competitive currently. This is especially true for investments that are in the range of one to two years or slightly more. A lot of investors deploy their funds for these time periods. Banks also need funds for this timeline and this has led to a range of competitive offers.
| HOW TO LOCK INTO THE BEST RATES |
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A look at the interest rates offered by banks on their FDs for small investors (who invest up to Rs 1 crore) shows an interesting trend: in most cases, the highest rate of interest across different maturities is either for the one-to-two-year time period or the two-to-three-year tenure. Typically, interest rates would rise as the tenure of the investment increases, but this is not the case for bank FDs. The rates offered by banks depend upon their need for funds for various time periods. Currently, most banks' interest rates for longer tenures are equal to or less than shorter-tenure rates.
A higher rate for the shorter time duration of, say, one or two years, means that an investor seeking the best rate would be attracted towards them. But it also means that they have to continuously keep on reinvesting when the deposit matures. If the shorter- term rates come down in the future, they will have to reinvest at a lower rate. However, if they lock their funds into a longer term deposit, they are assured of that rate for the entire duration. This eliminates the risk of lower rates in the future.
Post office time deposits: The rates offered by post office time deposits are crucial as they provide an additional choice for the investor with the same comfort level as that of bank FDs. Till March 31, 2016 the one-year and two-year post office time deposits have an interest rate of 8.4 per cent. These rates are significantly higher than the rates being offered by most banks. Since there are a few days left for the financial year to end, investors who prefer FDs can rush to put money in these instruments.
The situation changes dramatically from April 1, when the rate on the one-year deposit will plummet to 7.1 per cent while the rate on the two-year deposit will be marginally higher at 7.2 per cent. This will ensure that the post office option fades away from the top choices because the rates of several or rather most bank FDs for a similar time period, at present, are far higher. Whether banks also start cutting rates remains to be seen, but they have the upper hand in the existing circumstances.
How to get the best rate? This will take some research. For the one-year period, RBL Bank (formerly Ratnakar Bank) and the newly set up Bandhan Bank are offering 8.5 per cent, Indusind Bank and J&K Bank are offering 8 per cent, while HDFC Bank, Kotak Bank and Axis Bank are giving 7.9 per cent. What is notable is that there are a lot of big names where the rate of return is high. Doing a similar exercise for other tenures will ensure that you get the best rate.
For many banks, the investor will witness that the interest rates for a one-year and even a two-year deposit are the same. Take for example J&K Bank, where keeping a deposit for one year or two years makes no difference as far as the interest rate is concerned. Both will earn you 8 per cent. The difference is the time period for which the investor will earn the interest. A two-year deposit would mean that the rate is locked in for a longer period. There are more such examples. At Karnataka Bank, for example, one can earn 7.75 per cent for both one- and two-year fixed deposits. A similar rate can be earned for both these time periods at Central Bank and Andhra Bank too.
Tenure versus rates: There are also situations where the FD rate falls as the tenure rises. This means that a higher rate of interest would be earned when the investor puts in money for a shorter tenure, such as one year and up to two years or slightly less than two years, and then the rates start falling.
This would mean that the investor has to smartly fix the time period by looking at the rates and adjusting the investment period by a few days. There are many examples of banks where the rate falls when money is invested for a longer time period. Axis Bank is offering a rate of interest of 7.9 per cent for one-two years. Then it goes down to 7.75 per cent. In case of HDFC Bank and Kotak Bank, the rate goes down to 7.65 per cent for a two-year time period from 7.9 per cent for the one-year period.
But there are also banks that are offering a higher rate for the longer term. A good example is RBL Bank, where the one-year FD rate is 8.5 per cent, which rises to 9 per cent when the time period goes to two years. Similarly, ICICI Bank has a rate of 7.75 per cent for a one-year FD, which rises to 7.9 per cent when the deposit is for 390 days. In this case, a higher time period of deployment will benefit the investor, both in terms of locking in money for a longer period and earning a higher return.
The writer is a certified financial planner
