Fixed deposits promise steady returns for two-three year investment horizon

These are depressing times for retail investors. With both stock market indices and interest rates going down sharply in the past one month, investors would be starved for choices to deploy fresh money. The BSE Sensex has fallen 7.3 per cent since the Union Budget (July 5). The country’s biggest bank, State Bank of India, cut fixed deposit (FD) interest rates by 5-75 basis points across tenors recently.

The outlook for both, at least in the short term, does not look too bright. With the government pushing for more cuts, there is likelihood that interest rates will head south. Also, given the US-China trade war, the slowing growth rate in the Indian economy, and other headwinds, stock markets are unlikely to make a sharp and sustained comeback anytime soon.

Many market experts, however, say this could be a good opportunity to invest in markets. Some are suggesting that investors should move out of FDs and invest in stocks or mutual funds (MFs), as the valuations are compelling.

The standard argument: Good stocks are available at low prices now. And it’s a persuasive argument. “Of course, if you want to start a systematic investment plan, falling indices are an ideal time to invest. Falling net asset values allow investors to garner more units of the same scheme. These additional units earn big returns when the market turns around,” said a financial planner.

Given the current market condition, many would be uncomfortable deploying new money into stocks or MFs now. They could look at FDs, especially if they wish to park their funds for a shorter period. And not necessarily from the biggest banks. There are some good options available.

For example, Utkarsh Small Finance Bank (SFB) is offering 9 per cent for 456 days to less than two years. Similarly, Suryoday SFB is offering 8.85 per cent for two-three years. And there are many others offering over 8.5 per cent.

If you are not-so comfortable with SFBs, even some private and public banks are offering good rates on FDs. Depending on their requirement for funds of a particular tenor — between one and three years —rates are as high as 7.30 per cent to 8 per cent. These include pedigree banks such as Axis Bank, Bandhan Bank, RBL Bank, and others. Even if you want to lock-in for five years to get tax benefits under Section 80C, most scheduled commercial and SFBs are offering over 7 per cent.

The post-tax returns, for people in the highest income-tax bracket (30 per cent without including cess), would be a recent 4.5-6 per cent — higher than the consumer inflation rate of 3.18 per cent in June. In other words, the real return will be positive.

Says Suresh Sadagopan, director, Ladder7 Financial Advisories: “For someone looking for secure returns for the next year or two, FDs from banks and SFBs are fine options. Others who want to take some more risks can look at debt funds. However, the returns will not be assured.”
 

As far as debt funds go, only the average annual returns of long-duration debt funds at 19.57 per cent, gilt funds at 14.75 per cent, and dynamic bond funds at 9.44 per cent have been good. Returns from all the other categories are languishing at less than 7 per cent.