FD interest rates on the rise: what should your investment strategy be now?
With interest rates on fixed deposits rising again, what are the different techniques you can use to invest for higher returns via FDs? Let’s look at some options.
Fixed deposit (FD) interest rates have come down significantly over the past three years. Currently, the repo rate is at an all-time low of 4%, which has not changed since May 2020. This trend has led investors to look for alternative ways to generate income.
Fortunately, there have recently been small increases in FD rates from some financial institutions, including national banks. This portends a trough in rates and investors need to prepare their strategy to make the most of it.
So what are the different techniques you can use to invest for higher returns via bank FDs? Let’s look at some options.
Short or medium term FD
When the interest rate cycle returns after bottoming out, it has been noted that short and mid-term FD interest rates react faster to rate changes than long-term FDs. Investing in FDs with a short or medium term maturity helps you move to a higher FD rate. When rates are expected to rise, you should avoid committing to long-term FDs as you may miss out on the benefits of rising interest rates. The interest rate may not increase immediately, but it may increase gradually. Thus, short-term FDs can keep your FD investments closer to the prevailing interest rate offered by banks, according to Bankbazaar.
Variable Rate FD
A few banks offer variable rate FDs to their customers. The interest rate on floating rate FDs may not seem attractive compared to today’s fixed rate FDs; however, if the rate rises, variable rate FDs can easily be winners. Variable rate FDs can be beneficial if you don’t want the hassle of continually switching from older, short-term FDs to higher-rate FDs.
Diversify new FD investments in bank and corporate FDs
When interest rates rise, it is not only banks that raise their FD rates, but corporate FD rates are also raised. Diversifying your investment into banks and FD companies can be a good option for better average rates. By diversifying FD investments in banks and FD companies, you can ensure higher returns on your investment. FD companies offer a higher interest rate, but you should do your due diligence before investing your money. The table below allows you to compare the FD rates currently offered by banks and companies.
Compiled by BankBazaar.com
Note: Data as on respective banks/FIs website on 08 Feb 2022; The maximum interest rate offered (in the shortest term) by banks and companies is taken into account in the table; Banks whose FD interest is higher than the best interest rate offered by SBI are listed in the table. Only deposit rates of AAA-rated companies are considered in the table. The interest rate is for a normal fixed deposit amount of less than Rs 1 crore.
Use FD scaling option
Laddering FDs is an excellent option to ensure a high return on FDs in the face of rising interest rate risks. You can create your own FD laddering strategy by allocating your lump sum fund into different FDs with multiple maturities.
For example, if you want to invest Rs 5 lakh, you can divide it into 5 FD with a maturity period of 1 year, 2 years, and so on up to 5 years. At maturity, you can use the amount if you have a requirement, or you can continue with the existing ladder by reinvesting the matured corpus into a new FD for 5 years. You can choose different banks, companies and the FD amount while creating an FD ladder strategy.
When the interest rate is expected to increase gradually, you can move your corpus to an FD which offers a higher interest rate at each maturity. Thus, you can ensure a higher return on investment in the long term. If you create an FD ladder by investing money in the deposit systems of different banks, it can also help you get the insurance benefit up to Rs 5 lakh in each bank.
You should not wait for a rise in rates to invest in FDs because it is not certain when the rate will rise, and there is a chance that it will happen several times. So, after each hike, you will be attracted to another rate hike. Until you invest, you will lose the return of your corpus. Use these techniques to get the most out of your FD investment.
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