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Home > Business > Business Headline > Personal Finance

Fixed Deposits: On a comeback trail!

February 25, 2006 14:08 IST

For sometime now, we at Personalfn have advocated that investors should gear up for rising interest rates.

Recent events like a hike in reverse repo rates in the Monetary Policy, uptick in home loan rates and fixed deposit rates only substantiate this view.

In our view, the economy is undeniably headed for higher interest rates (higher than what most people expect) and investors on their part need to make necessary adjustments in their portfolios to gear up for the situation. In this article we shall discuss strategies for fixed deposit investors.

For risk-averse investors who prefer to invest in assured return schemes, fixed deposits are 'core' investments. The recent hike in FD rates means that their investments have become relatively more attractive. Another segment of investors that stands to gain is senior citizens.

Senior citizens typically need an investment avenue which offers assured returns at regular intervals. Also safety (of capital and interest) is a priority. Furthermore, the higher rates on FDs for senior citizens adds to the allure.

FD rates: Headed northwards!
HDFC Limited
December 2004December 2005February 2006
(Interest rates for the cumulative option)

We believe that interest rates could move up even further. With demand for capital showing no signs of receding and other factors like high crude oil prices, which could fuel inflation, a soft interest rate regime seems improbable.

Investors on their part need to factor in such a possibility before making investments.

Fixed Deposit Rates
HDFC LimitedState Bank of IndiaICICI Bank
(Interest rates as on February 22, 2006 for the cumulative option)

What should investors do?

If fixed deposits are your calling, then they should find place in your portfolio. Investors would do well by investing in line with their risk profiles. For example, if you are a risk-averse investor, don't be tempted to invest in equities to capitalise on the bull run (if someone tells you that equities are not risky, don't believe him!).

Secondly, even investors with an appetite for high risk avenues should consider investing in fixed deposits from a diversification perspective. The higher interest rates on offer only make fixed deposits a more lucrative option.

However, after being stripped of tax benefits (Section 80L was scrapped in the last budget), FD investments may prove to be relatively unattractive for investors in the higher tax brackets.

Where should you invest?

1. Short-term deposits
Investors shouldn't lock-in their investments for longer time frames. The same might prevent them from benefiting from any further hike in fixed deposit rates. Hence fixed deposits of relatively shorter time frames should be chosen.

2. Variable rate deposits
Variable rate deposits enable investors to capitalise on a future hike in interest rates. The rate of interest on these deposits is reset in line with a benchmark rate. Hence a degree of flexibility is incorporated in the fixed deposit's earning potential.

Finally, investors should consider investing in fixed deposit schemes with an 'AAA' or equivalent rating. The same is indicative of a high level of safety something a risk-averse investor could really do with.

For a Free download of the latest issue of Money Simplified - Retirement Planning & YOU, click here!

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