Add fixed deposits to your portfolio as rates on offer are quite reasonable

With interest rates expected to go southwards in the coming months, it could be a good time for risk-averse investors to get locked into fixed deposits (FDs), or even recurring deposits (RDs). What works in favour of these instruments is the safety factor — a crucial factor, given the problems being faced by non-banking financial companies, which, in turn, are hurting debt funds.

The returns offered by such instruments are in the range of 6 per cent and 7.5 per cent a year. However, once the tax comes into play, the returns would be to the tune of 4-6 per cent a year.

The good news? With consumer price inflation rate rising at 3.18 per cent (in June), the real interest rates are in the positive territory for investors. Though one cannot bet on inflation staying low for the next five years, it is a good time for risk-averse investors.

In the FD space, there are some interesting options. Punjab National Bank (PNB) offers 6.8 per cent rate of interest on its one-year bank FD, whereas its subsidiary PNB Housing Finance offers 8 per cent on a similar deposit. Similar options are available if you are willing to venture out of the public sector.

HDFC Bank offers 7.3 per cent rate of interest on one-year FD, whereas Housing Development Finance Corporation, the bank’s parent company, offers 7.83 per cent rate of interest on a 15-month FD. If you can find out more such bargains, without taking additional risk, you will get a decent boost to your debt portfolio. However, if you are opting for a company deposit, you must go for a higher rated instrument to minimise default risk. Of course, if you want to lock in for five years, State Bank of India is offering 6.6 per cent. This investment will also get the tax benefit under Section 80C limit of Rs 1.5 lakh.

This is why many financial planners advise using this instrument for investment as well as meeting short-term goals. “One must not use these investments to fund their long-term goals, as it will lead to capital erosion. For long-term goals (more than five years), we must look at investing in equities and give the highest real return (after considering inflation) in the long run,” says Amar Pandit, founder of Happyness Factory.

So what kind of goals should be funded by these instruments? For example, funding your child’s school/college fees or buying a small car in the next couple of years. Investing for that goal in equity mutual funds (MFs) or stocks could be disastrous if the markets tank. Even your principal could be under danger. Anil Rego, founder and chief executive officer, Right Horizons, proposes FDs and RDs for goals that are coming up within one year. “FDs/ RDs can be avoided for long-term goals above one year like retirement planning, home buying, marriage and others. Long-term wealth can be created using either equity MFs or hybrid MFs. If an investor’s concern is only the safety of capital, we can go with debt MFs, where taxation benefit is more,” advises Rego.


Advantage FDs

•  Advantage fixed deposits for short-term goals
• Interest rates on offer 6 per cent-7.5 per cent
• Post-tax returns 4 per cent-6 per cent
• Bank’s subsidiary/parent may offer better rates than banks
• Five-year fixed deposit will offer tax benefit under Section 80C