Fixed deposit interest rates are increasing: should you choose this instrument? 1

After years of dealing with falling FD interest rates, there’s a hint of relief for FD investors. With the RBI (Reserve Bank of India) increasing their policy rates and the chance of further hikes, many banks have started raising their FD rates.

Are fixed deposits an outdated concept - Finserv MARKETS

Minimal rise

The FD rate increment announced by the banks has been nominal till now. While lenders have been increasing FD rates by up to 50 bps (basis points), such deposits are being provided just on the long-term FD, typically on FDs of over three years. The FD rates of one or two years, a highly used option, have increased by 10–30 bps. This is nowhere near the 140-bps increment in the repo rate by the Reserve Bank of India and does not even beat the inflation.

So, is opting for this investment option now a good choice? Here are techniques you can leverage to invest for a higher return through fixed deposits.

1. Short or medium-tenure fixed deposit

When the FD rate cycle turns up after bottoming out, it’s noted that medium and short-tenure FD rates respond faster to the rate change than the long-term FDs. Investing in fixed deposits having short- or medium-term maturity assists you in shifting to higher FD interest rates.

When the FD rates are expected to rise, you must avoid committing to a long-term fixed deposit as you might not be able to make the most out of the rising rate. FD rate might not rise immediately, but it might inch up gradually. So, the short-term fixed deposit can keep your fixed deposit investments nearer to the current rate provided by the banks. Ensure to opt for the highest FD interest rates in the short-term tenure.

2. Floating interest rate fixed deposit

A few banks may offer floating-rate fixed deposits to you. Floating interest rate FDs might not appear more attractive than fixed-rate FDs. However, floating-rate FDs may be the winner if rates keep rising. Floating-rate FDs may be advantageous if you do not want to face the hassle of constantly switching from short-term fixed deposits to higher-rate fixed deposits.

3. Diversify your parking in corporate and bank fixed deposits

When the interest rate rises, it is not just the banks that enhance their fixed deposit rates; corporate FD rates are also increased. Diversifying your corporate and bank FD investment can be prudent for better average returns. By diversifying your fixed deposit investments in corporate and bank FDs, you may ensure higher returns on investment.

Corporate fixed deposits may provide higher rates; however, you must conduct due diligence before investing your funds.

A fixed deposit is a good choice if you are a conservative investor. You may also opt for this instrument if you want to accumulate funds for short to medium term. Using this instrument, you can park your exigency corpus or corpus for your short-term goals. Given the volatility and uncertainty in equity markets owing to macroeconomic reasons and geopolitical tensions, an FD ensures utmost fund security.

You can invest in FDs with several institutions in India. IDFC FIRST Bank FDs is one option you can consider; you can earn – up to 6.90% on your deposits and invest without leaving your house, and 0.5% additional interest for senior citizens