Along with many other banks, the State Bank of India, India’s largest bank, has recently slashed its fixed deposit rates, which is bad news for investors looking to park their hard-earned money in FDs. After all, many risk-averse investors as well as senior citizens bank on FDs for assured returns as well as the safety of capital. However, the falling interest rates of FDs apart from many other safe investment options like PPF are keeping them confused and they are wondering what to do in the current scenario.
Industry experts, however, say that there is not much to worry as some banks are still offering higher interest rates. Small finance banks, for example, are currently offering the highest FD rates. In fact, a few of them are offering interest rates as high as 9% per annum.
“They are followed by smaller private sector banks like DCB Bank, Lakshmi Vilas Bank and IDFC First Bank wich are offering interest rates in the region of 7.5% to 7.8% p.a. On the other hand, the highest interest rate slab offered by PSU banks and bigger private sector banks are 6.5% p.a. or lower,” says Naveen Kukreja, CEO & Co-founder, Paisabazaar.com.
Financial planners say that anyway, FDs provide low returns and are far from ideal for investing. There are only two good use cases for FDs. One, they help manage liquidity in a safe manner for your short-term needs, including any emergencies such as loss of income or health problems. Two, they help generate assured returns and ensure capital safety for the retired.
“FDs are also not tax-efficient, which means that your interest income from your fixed deposits will be fully taxable as per your income tax slab. So, if you are in the 30% slab, a 7% FD would actually return you only 4.9% after taxes. The exception here is that senior citizens get Rs 50,000 tax-free returns from their deposits,” says Adhil Shetty, CEO, BankBazaar.com.
Therefore, for creation of wealth at an accelerated pace – 8% per annum or upwards – you’ll have to look beyond fixed deposits. For instance, if you seek assured returns and the safety of your capital, you’d be well advised to try government-backed schemes such as the VPF or PPF. If you want higher returns, you should try mutual fund schemes suited to your investment goals.
“Any investment – including FDs – should be tied to your investment goals. Whether this is the best time to start an FD should depend entirely on your goals. If you’re saving up for a short-term need, looking to park your money while the stock markets calm down, or looking for assured interest for your income needs, the FD should help you in your goal. But if FDs don’t provide you the appropriate post-tax returns for your goal, you should look at investments that do,” advises Shetty.
Whenever you want to invest in FDs, it’s better to check the financial health of the bank beforehand. Try monitoring parameters like the NPA ratio of the bank. You can also choose to distribute your money in two or three FD accounts held with different banks. If you’re unsure about a particular bank, you may want to limit your invested sum plus interest earned to Rs 5 lakh as that much is insured by the DICGC, an RBI subsidiary, in case the bank fails.
“All the small finance banks, private sector banks and public sector banks are scheduled banks covered under the deposit insurance program of Deposit Insurance and Credit Guarantee Corporation (DICGC), an RBI subsidiary. Under the deposit insurance program, bank deposits of up to Rs 5 lakh of each customer in each bank is insured in case of a bank failure. The insurance program covers both the interest and principal component of savings account, FDs, RDs as well deposits in the current account,” says Kukreja.
