Higher rates can adversely impact your Fixed Deposits!

BANKS are quick to lower fixed deposit (FD) rates when the interest rates fall, but they take their own sweet time to raise rates when the interest rates rise. How many times have you heard this refrain from someone, especially a retired aunt or an uncle, in the recent past? With living expenses soaring each day, most investors, especially those who swear by FDs and other relatively safer avenues like company deposits and mutual fund (MF) schemes, are in a fix. The expenses may mount, but their interest income remains steady.

INTEREST RATE SCENARIO
The Reserve Bank of India (RBI) has started raising the policy rate since February in its effort to contain inflation. This means, interest rates — the key variable to watch out for a fixed income investor — is surely north-bound, at least, in the short term. What do you do in such a scenario? Consider this: you can’t lock the money in long tenure FDs because you can’t take advantage of rising interest rates.

SHORT-TERM INVESTMENTS
If you are looking to park your money for less than a fortnight, choose a liquid fund.
The liquid-plus option is more suitable for an investment horizon of more than a fortnight. These funds can give better tax-adjusted returns than saving bank accounts. However, don’t treat these funds as investment avenues. Before investing, take a look at exit loads charged by the schemes, if any, as exit loads erode returns.

MEDIUM-TERM NEEDS
You can consider company deposits and Fixed Maturity Plans for your medium term investment needs. Company deposits pay a little better than bank FDs, but they are more risky. Always look at the credit rating of the company and don’t invest more than 10% of your debt portfolio in a single company. Also, don’t invest in deposits over a year, say investment experts. Remember, the yield on an FMP is a function of the credit quality of the papers in the portfolio and the tenure. One can expect better post-tax yield on an FMP than a corporate FD of similar credit quality for equal tenure.

LONG-TERM INSTRUMENTS
In a rising interest rate scenario, the first thing most advisors will ask you is to stay away from long-term debt schemes. With inflation tapering off, long-term rates are likely to ease a bit. If you do not want to take credit risk, you can look at gilt funds that invest in government securities.

Source : ET