With fixed deposit interest rates on a downward trajectory, we tell you if it is time to look at other safe investment options to fetch better returns.
Fixed deposits are one of the most preferred investment options. This can be attributed to the fact that fixed deposits are relatively risk-free, offer reasonably good fixed deposit interest rates, have a fixed tenure and, finally, provide guaranteed returns at maturity. In addition, banks and some NBFCs allow you to withdraw your fixed deposit prematurely after a portion of interest is reduced as penalty.
However, the past two years have witnessed a declining interest-rate scenario where the fixed deposit interest rates have fallen around 2%. This has translated into a lower monthly interest income on fixed deposits. What’s more, with banks flush with funds post demonetisation, there are more funds to be lent to customers. This indicates a cut in the lending rate, a scenario that is preceded by a cut in the fixed deposit interest rates. Moreover, due to a fairly benign inflation outlook, easy liquidity and the strengthening rupee, the fixed deposit interest rates are expected to fall further. This is the right time for you to explore some smart investment options to fixed deposits, such as:
- Post Office Savings Schemes (POSS)
The Post Office offers various low risk schemes, such as Recurring Deposit Account, Time Deposit Account, Monthly Income Scheme Account, Senior Citizen Savings Scheme, Kisan Vikas Patra and Sukanya Samriddhi Accounts. When you opt for these schemes, you generally get higher returns. In addition, there is no tax deducted at source (TDS) in these schemes. The Monthly Income Scheme Account is a good bet if you are a retired individual or have regular income needs, and so is the five-year National Savings Certificate (NSC), where you can start by investing as less as Rs.100. You can pledge NSCs as collateral to get loans.
- Public Provident Fund (PPF)
PPF is a fixed-income, small savings schemes that is ideal if you are looking to build a tax-free retirement corpus. Those who do not have any investment plans for their retirement, such as self-employed persons and professionals, can opt for PPF. Investments in PPF will fetch an annual interest rate of 7.9%. The entire proceeds on maturity, including returns are tax free. Any deposits that you make are eligible for deduction on investments (up to Rs 1.5 lakh) under Section 80C of the Income Tax Act. Your PPF account matures after 15 years and you can renew it every five years thereafter. You can withdraw your investment made from the seventh financial year of opening the account.
- Company Fixed Deposits (FDs)
Many companies offer small investors the facility to place fixed deposits with them. The companies offer varying fixed deposit interest rates as per the credit rating assigned by credit rating agencies— which indicates a company’s health—and their brand perception. The fixed deposit interest rates on company deposits is generally 2-3% higher than the fixed deposit interest rates offered by banks for similar periods. However, don’t be lured by high fixed deposit interest rates on corporate fixed deposits for better returns. Cautiously select the companies to invest in your hard-earned money, and invest in companies with AAA or at least AAA rating. This is important particularly in view of the fact that some companies, in recent years, have been found delaying the payment of interest and principal on their FDs due to financial problems or otherwise. You can consider investing in an FD with an NBFC, which has a good safety rating and offers a higher interest rate than banks.
If you are looking to avail of some capital gains tax rebates or make a large investment, bonds are ideal fixed-income investment options. Bonds serve as an IOU between the issuer and the purchaser. As an investor, you loan money to an institution, such as a government or a company, and the bond serves like a written promise for paying back the loan on a specific maturity date. Bond purchases are generally considered to be secure investments, and government or highly-rated corporate bonds feature very little risk of default.
- Debt mutual funds
Debt mutual funds invest in fixed income instruments, such as government bonds, that are generally considered safe. When there is a decline in the interest rates, bond prices rise. With interest rates trending down, debt mutual funds can help you get capital appreciation (from bond price rise). Thus, debt mutual funds have the ability to position themselves to benefit from falling interest rates. The tax is calculated on the basis of short-term and long-term capital gains. The dividend income earned from debt mutual funds is tax-free.
Whether you are a conservative investor or are comfortable with taking some risk for better tax-efficient returns, NBFCs offers Senior Citizen fixed deposits with competitive interest rates and mutual fund schemes for your investment.