The news has been grim for quite some time: inflation, geopolitical tensions, supply chain disruptions and volatile markets. Amidst all this, there is still reason for some investors to rejoice. Lenders are increasing the interest rates offered Fixed deposit (FD). But, would it be a smart strategy to increase the allocation for FDs, especially when the stocks have failed to deliver better returns?
Several lenders like HDFC Bank, ICICI Bank, Kotak Mahindra Bank and Axis Bank have recently revised their FD rates. The data shows that major scheduled commercial banks (SCBs) are offering higher interest rates (up to 6%) on long term FDs. Small SCBs and small finance banks are offering interest rates up to 7.5%. Senior citizens get additional payment in the range of 50-75 basis points on their deposits. Meanwhile, the NSE benchmark Nifty 50 is up nearly 3% on a year-on-year basis, while the index is up 8% in the red on a year-on-year basis.
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Nevertheless, experts caution against excessive reliance on FDs. “You invest in equities for a specific reason and for a specific period of time. When you are close to your financial goal or target, then you should exit equities and start investing in FDs. Also, withdrawing money from equities at this point, when many investors are looking to participate more in equities here, may not be a prudent strategy,” said Harshad Chetanwala, SEBI-registered investment advisor and co-founder of MyWealthGrowth.
It should be noted that bank FDs are not a good way to invest as their returns are negative after inflation and tax. However, these tools are good for parking emergencies or surplus money.
Experts are of the view that even though interest rates on bank deposits have been hiked in the recent past, banks will not be in a hurry to hike rates further. “The repo rate will increase, but banks will increase the rates based on their liquidity requirements. Banks will not rush to increase the interest rates on FDs until the credit speed picks up. Right now, it may be better to look at short term fixed deposits of six-nine months,” Chetanwala said.
Furthermore, financial advisors caution against going for weak banks that offer high interest rates on deposits.
“Go for a good quality bank, where the asset quality is much better and the bad assets are less. Keep up with the top banks. Don’t opt for weak co-operative banks and NBFCs where you are getting higher returns, said Rishabh Desai, founder, Rupee with Rushabh Investment Services.
Investors should also note that while interest rates have risen, returns have risen more at the longer end of the term – certainly increased at the “short end of five years and above, but not as much as the longer term”. At the end of the year, the yield curve spikes. So, we are going to see aggressive rate hikes until at least the beginning of 2023,” Desai said.
Experts say investors should stick to the short end of the yield curve, and move to three- or five-year FDs once the interest rate cycle reaches the peak.
In terms of taxation, the interest earned on FDs is added to ‘income from other sources’, and tax has to be paid as per the slab rate. Also, if the interest on your FD is more than 10,000 in a financial year, banks deduct TDS of 10% if you have provided PAN details.