In the last two weeks, HDFC Bank, HDFC and Bajaj Finance have increased the interest rates on their FDs. After the latest status quo announcement by RBI, more banks may hike interest rates for now.
RBI announced its decision to keep the repo and reverse repo rates unchanged on December 8, 2021, following its bi-monthly monetary policy review. in present, repo rate Stands at 4% and the reverse rate is 3.35%. There has been no change in policy rates from May 2020. The repo rate at 4% is the lowest since April 2001. Due to the reduction in policy rates, the interest rate on FDs is at a many-year low.
So, what to do after the latest RBI announcement FD investors To increase their returns?
short term deposit rates
It has been observed that whenever interest rates start rising, the first small to medium FD rates are hiked. A week ago, HDFC Bank increased the interest rates for these FD tenors: 7 to 29 days, 30 to 90 days, 91 days to 6 months, 6 months to 1 day to less than one year.
Avoid investing in long term FDs
When you renew your existing FD or invest in a new FD, it is better to opt for a shorter tenure. By opting for shorter tenure deposits, such as one year or less, in the current scenario, you can avoid locking your money for a longer period and can avail the benefits whenever the interest rate rises.
Penalties can be levied if you currently lock your money for a longer period and later break your FD before maturity and reinvest it at a higher interest rate.
Use FD Ladder Strategy to Avoid Diminishing Returns
At present, the interest rates on FDs are the lowest. What can investors do now to increase their returns? According to financial planners, in the current situation, this can be done by creating an FD ladder. An FD ladder is created by breaking a large FD into smaller FDs of different durations.
For example, if you have an existing FD of Rs 5 lakh, you can divide it into 5 parts and pay Rs 1 lakh for different tenures of 1 year, 2 years, 3 years, 4 years and 5 years. Can book 5 FDs. , After one year, when the one-year tenure FD matures, it is renewed for 5 years. After two years your FD with tenure of 2 years will mature so you can renew it for the next 5 years. Now repeat this exercise every year and your ladder will be ready. This will ensure that all your deposits are not locked at the same time at the lowest interest rate and your average return is high.
View Floating Rate Options
Investors also have the option of investing in floating rate FDs or floating rate bonds to avoid locking the funds for a longer period.
Under floating rate FD, the interest rate on the deposit is linked to a benchmark and the interest rate is fixed with the fluctuation in the benchmark rate. Thus, once the overall interest rate landscape changes and rates start rising, depositors will get the real benefit of floating rate FDs as the interest rate on these FDs will also go up.
Currently, Indian Overseas Bank and IDBI Bank offer floating rate fixed deposits. Apart from banks, a person also has the option of investing in floating rate bonds of RBI.
RBI’s floating rate bonds are currently offering an interest rate of 7.15% per annum with a tenure of 7 years. Interest is payable half yearly and the rate of interest is linked to the National Savings Certificate (NSC). Any change in the interest rate by the government in NSC will affect the interest rate of these floating bonds.
Read also:
Government launches 7.15% floating rate bonds: Here’s everything you need to know