Home Substantial portion 5 things investors should keep in mind

5 things investors should keep in mind


Days after the State Bank of India and HDFC Bank raised fixed deposit (FD) interest rates, several other banks including IDBI Bank and IndusInd Bank followed suit. Previously, the Central Bank and UCO Bank also raised FD rates (see table).

Rate hikes continued although the Reserve Bank of India (RBI) kept repo and reverse repo rates unchanged in the latest monetary policy announcement on February 10. Repo and reverse repo rates currently sit at 4% and 3.35%. respectively.

Most seniors invest in FDs because returns are guaranteed and unaffected by market volatility. Moreover, many of them are not in the highest income tax brackets. FDs are taxed at slab rates and returns from these may not be efficient as taxation and inflation eat away at a substantial portion. However, with the banks increasing the interest rates of the FD, many young investors may also tend to invest in it for their debt allocation.

Should you invest now?

As FD interest rates rise, is now a good time to lock your money in these instruments? Here are some things investors should keep in mind before investing in FDs.

FD Rate Chart

Wait a few more months: Experts suggest it makes sense to wait a few more months as rates are likely to rise further in the near future. “As the Government Securities Rate (G-Secs) generally serves as a benchmark for interest rates on FDs, the increase in the G-Sec (10-year bond yield) by 6.4% on 3 Jan 2022 at 6.68% on Jan 27, 2022 at 6.69% on Feb 21, 2022 could be the reason for the increase in the interest rate on FD in the coming times,” says Pradeep Multani, President of the PHD Chamber of Commerce and Industry, an industry body Percentage values

Opt for a short-term investment: Since there is a good chance that rates will rise in the near future, you could invest for the short term, assuming that interest rates will rise in the future. “The interest rate on short-term deposits may increase in the short term as inflation rises due to higher global oil prices and escalating geopolitical tensions. The effect on long-term deposit rates will only be felt if inflation stays in a higher path,” says Multani.

Use to create an emergency corpus: Short-term FDs can also be useful for parking your emergency corpus, regardless of prevailing interest rates. “Investors can consider parking the cash they need for the short term or the emergency fund they have built up in fixed deposits,” said Harshad Chetanwala, Certified Financial Planner and co-founder of My Wealth Growth, a financial planning company. It is not advisable to keep your emergency corpus in the savings account because you might end up using the money for other purposes if you are not disciplined enough.

Good choice for novice investors: New investors may have money to invest, but it may take some time for them to understand the complexity of the market. For them, FD can be a good option to understand how investments work. “The interest rates offered on FDs are higher than savings accounts, offering the best returns. Since there is no market involvement in FDs, the risk factor is extremely low adds Multani.

Consider the consequence: Although having good returns on FD relieves investors, one must be prepared for the consequences this may have on other sectors. “If interest rates continuously increase, it will have an impact on the real estate sector, as banks also start increasing interest on home loans,” Multani adds.