Floating rate good for risk-wary, not so for HNIs

Yesterday, Housing Development Finance Corporation introduced a first in the deposit market — a floating rate recurring deposit.

A monthly savings product, this scheme allows investors to put in a fixed sum of Rs 2,000-50,000 monthly for two to five years. The advantage: Unlike fixed deposits or other recurring deposits, the rate will be reviewed every three months.

The current interest rates on offer are 7 per cent for 24-35 months, 7.25 per cent for 36-59 months and 7.75 per cent for 60 months. VS Rangan, executive director, HDFC, said, “Given that interest rates may inch up in the medium-term, it is a good proposition for investors.”

The product will work in the following manner. If you start investing now, the interest will be reviewed in April. In case of a premature withdrawal within the first three months, there will be no interest payment.

If withdrawals are made between the fourth month and at the end of the tenure, the interest payable will be 2 per cent lower than the rate applicable for the period. If any rate of interest has not been specified for that period, the rate earned will be 3 per cent lower than the minimum rate at which the deposit was offered. Importantly, there isn’t a loan facility against the deposit.

Starting for today, this scheme is available in select cities where electronic clearing system (ECS) facility is available. An account under this scheme— HDFC - Systematic Saving Plan (SSP) — can be opened jointly and in the name of minors as well.

In case of joint account, the first depositor will be considered as a beneficial owner for repayment and income tax. For minors, necessary details and know-your-customer documents of the guardian is required.

Financial planners said the plan was a good proposition for two kinds of investors — those falling below the income-tax bracket, and the completely risk-averse. In the former case, mostly pensioners and retirees can earn a slightly higher rate. Yes, there could be a downside as well, if rates start coming down.

But with the outlook being that rates may go up in the next few quarters, it could be a good option. Anil Rego, CEO, Right Horizons, said, “Ideally, the interest rate cycle changes every three years or so. Therefore, parking money in this scheme for three years makes sense.”

Also, risk-averse investors, who have not graduated from plain vanilla fixed deposits, can look at this investment. Hemant Rustagi, CEO, Wiseinvest Advisors, said, “For those who are looking to park money in FDs for the long term, in the current scenario, where interest rates are likely to rise in a few months, this is a good scheme.”

However, investing in such schemes could hurt high networth individuals (HNIs) due to the tax aspect. The interest income will be taxed at 33 per cent.

In comparison, tax on long-term debt funds is 10 per cent with indexation and 20 per cent without indexation.