The interest rates have started their southward journey and are creating new nadirs with every passing day. The debt instruments strategies needs to be analysed and the key component of this basket is “Bank Fixed Deposit”. The best part of the Fixed Deposits are liquidity, safety and reinvestments which allures the investors towards them but the lower rates are a deterrence for investment.
The Bank FDs currently quotes in a range of 7.75% to 8% at their peak and one can add another 25 to 50 bps for senior citizens. The rates will further go down if one factors in the tax rate which is applicable as per the tax slab the investor falls in. If we further factor in the average inflation of 5% to 6%, we eventually get a negative return on our FD investments.
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Liquidity, Reinvestment and Safety
Bank FDs are definitely liquid and can be broken as per your convenience but this comes as a cost of lower interests as a penalty because of pre-mature withdrawals. Reinvestments at a lower interest rate will impact your financial goals which depends on time horizon and risk profile. Shifting for few enhanced interest rates bps in another bank will not yield any rich dividends. The 1 Lakh Rs safety of savings are not that big impetus for choosing a bank for investment.
One cannot deny the safety of Fixed Deposits but the lower interest rates are big turnoffs and thus one should explore and evaluate other options which are relatively safe and outscore the FDs in terms or returns and provides a better tax advantage.
If the fixed deposits are arsenals of the long term financial plan: PPFs, Tax Free Bonds and Sukanya Sammradhi Yojna (for the girl child under the age of 10 years) are superior options with a phenomenal tax advantage. They fall in the Exempt-Exempt-Exempt (EEE) category with no tax applicability at investment, intermittent income streams and redemption stage.
For the short term perspective with a time horizon of 3 years and above, one can invest in ultra- short and short-term debt funds or FMPs. Arbitrage Funds can be ideal investment options for 1-2 year timeline. These investment paths are not popular because their returns are not guaranteed and are market linked, which is subject to volatility to a certain extent.
Risk Profile also matters
In addition to the time horizon, the investors risk profile is an important factor. If one can take moderate risks, Monthly Income Plans and Corporate FDs are also good investment candidates which yield better returns vis-à-vis the traditional low risk instruments. In corporate deposits, investors should focus on top rated deposits but with the higher rates bounty, premature withdrawal can be a tricky situation.
MIPs have an equity flavour in them along falling in a range to 10% to 25% along with debt instruments.
Systematic Withdrawal Plans in MIPs and debt funds are good bets for those who have periodical funds requirements. The investors get monthly or quarterly funds either on a fixed mode (fixed withdrawal) or on appreciated mode (only withdrawal of the appreciated funds)
To sum up, the investment pattern should change with the changing times. The inflationary scene will grow with times and thus one needs to amend the financial plan accordingly for a secure and prosperous financial feature. One should choose an investment option which optimises returns, ensures liquidity and minimises tax without compromising on safety.
Other than FDs which other investment options you will choose for higher returns and tax advantages?