At this juncture, longer-duration bank deposits look unattractive.
Bank fixed deposits (Fds) are integral to the portfolio of most investors. Once a very stable part among the various investment components, this is no longer so. A lot of changes affecting this area regularly, requiring the investor to keep an eye out for developments so that adequate benefits can be garnered. FDs also require regular attention because amounts that keep maturing at specified durations and hence decisions also need to be made about redeploying the funds.
INTEREST RATE
In the calendar year 2008, interest rates on FDs were on a sharp upswing as inflation skyrocketed. This led to a situation where investors were in a strong position, as they could choose from the various offerings in front of them. Banks were also desperate to get money for specified time intervals and due to this, there were special period deposits offered to investors with higher interest rates. The trend has slowly reversed and over the past few months, banks have been slowly cutting the rates. The question for investors is if they should still invest at the current juncture or wait for some more time before considering fresh FDs.
SPECIAL DEPOSITS
There was a lot of attention on special deposits. These were deposits for periods like 365 days or 780 days or even 1,000 days and special rates were applicable. These rates went to over 10 percent and they made great sense for investors to lock in their money. All those who did put in money for a longer time period are currently benefiting from the situation. The position has now reversed and this is evident from the action of banks.
Take State Bank of India. The bank offered a deposit for a special period of 1,000 days not so long ago. This was a separate category with a higher rate of interest. At the beginning of September, the investor would have earned 7.25 per cent here as against 7 per cent for deposits of a slightly higher or lower time duration. From September 8, 2009, there is no separate rate for a deposit of 1,000 days and this is merged with the two to less than three years category that offers a rate of 7 per cent. Similarly for Bank of Baroda, there is no special rate now for the 750-day deposit and this is at 7 per cent for periods of two years and above. If investors find a bank still offering a higher rate for a specific time period deposit, then they can consider using this opportunity based on suitability of other factors like time period, requirement of funds, etc.
OVERALL CHANGES
What is more worrying for investors is that the interest rates on normal FDs have been on a downward curve. Banks have been slowly reducing rates and this has brought a situation where the figures today are quite low. Banks have been following a policy of reducing rates for specific deposits only in the past couple of months and this impacts large number of investors,as these deposits are commonly used. Bank of India, for example, reduced the interest rates on its entire deposit range upwards of 46 days in the month of August. HDFC Bank also adjusted deposit rates for three durations in August.
A look at the overall rates offered by leading banks in both the private sector and public sector show that in many cases small savings like National Savings Certificates and even Post Office Term Deposits look highly competitive in returns for the investor. The rate for deposits over two years and 17 days for HDFC Bank is 6 per cent. SBI offers 7.25 per cent for three to five years, which goes upto 7.5 per cent for the five to eight years' duration. ICICI Bank offers 7.5 per cent for three to five years and 8 per cent for five to 10 years. Bank of Baroda offers 7 per cent for deposits of more than two years.
As the time duration of the investment increases, investors need to pay attention to several other offerings. Such as non-convertible debentures that are hitting the market at regular intervals. These often provide a higher return and the features might bring these into consideration for investment.
DECISION
At this juncture, unless there is no other option in terms of investment and the money has to be ploughed back immediately, the investor should not lock funds for a long duration in FDs. There are likely to be better opportunities in terms of rates and other features, including the time period or prepayment penalty, in the coming months. A rise in interest rates by the Reserve Bank of India and an uptrend in inflation can lead to a situation where the rates once again start an upper climb. But, till that happens, good investment opportunities will be hard to come by on the FD front.
The writer is a certified financial planner
