Choose deposit tenure in sync with future goals

Else, addressing liquidity needs will be difficult and you'll be charged penalty

If interest rates are likely to go down in 2013, as most economists and bankers are predicting, then locking into fixed deposits now would be a good option as banks would also cut rates, going forward. Experts believe that longer term deposits are better investments than shorter term ones. S Govindan, former general manager - personal banking & operations, Union Bank of India, says, “We may soon see the Reserve Bank of India (RBI) slashing interest rates and hence, it is advisable to opt for high-yielding, longer-tenure deposits, say, for five years or more.”

The first thing to do is choose the bank as there are differences in interest rates across banks. Individual banks give higher rates on certain tenure of deposits in order to correct their asset-liability mismatch. So, even if RBI may not change interest rates, individual banks do. For example, in the last week of December, Federal Bank and Dena Bank raised deposit rates by 25-35 basis points for fixed deposits with tenures ranging between one and three years.

Unlike earlier when longer tenure deposits carried higher rates and shorter ones gave lower rates, these days banks have fixed rates over many tenures. Sample this, State Bank of India (SBI) is paying a flat nine per cent for deposits maturing between one and five years. Similarly, HDFC Bank is paying 8.75 per cent for deposits maturing between one year and 15 days to two years and 16 days. And Canara Bank is paying 8.50 per cent for deposits with tenure between two and ten years.

Typically, in a falling interest rate regime, which may start soon, longer term deposits should be preferred to shorter term ones. However, this rule can’t be followed always as there would be other considerations. First, choose a deposit tenure that’s in sync with your future monetary needs. Says D Sundarajan of Mumbai-based Trendy Investments, “We advise long-term deposits to conservative investors having a goal in mind. Otherwise, fixed deposits are best meant to serve liquidity needs and can be invested for one year or so.”

You could align the tenure of the fixed deposit with your long-term goals like a child’s marriage or higher education. Or, use the deposits as a source of regular income if you are retired. Interest on the deposit account is credited to the savings account, if specified, on a monthly or quarterly basis. “If you have a goal in mind, you can talk to the bank and get a tenure in line with your needs or choose from the special tenures like 999 days or 1,000 days,” adds Govindan.

Financial planners also advise aligning goals with deposit tenures. What if you lock the funds for, say, three years but need the money earlier? You can withdraw prematurely but only after forgoing 0.5 to one per cent, depending on the bank.

Certified financial planner Suresh Sadagopan says, “Earning consistent returns is not always good news if you’ve invested for a very long time without a goal in mind. And, if you choose a three-year deposit earning 9.5 per cent over a five-year deposit offering nine per cent, you may face reinvestment risk once the term ends.” He suggests dividing the corpus into two parts: “Invest one part in short term deposits for liquidity needs and the remaining in longer term deposits, preferably linking it to a long-term goal.”