Get locked into fixed products

There is a small window till March-end. After that, liquidity will ease and banks might not be so benevolent

For fixed deposit (FD) investors, there is some good news. Despite the rate cut by the Reserve Bank of India (RBI), banks are unlikely to cut deposit rates for some time. The mood was set yesterday itself.

Just a day before the Third Quarter Review of the Monetary Policy, two leading private sector banks – ICICI Bank and Axis Bank – increased deposit rates. This, despite the expectation that RBI will cut benchmark rates. RBI, with 25 basis point cuts in both repo and cash reserve ratio (CRR), delivered on the expectations.

Banks might not be too keen to cut deposit rates till at least March-end due to tax outflows, which will keep liquidity under pressure. Like Chanda Kochhar, managing director and chief executive officer (CEO), ICICI Bank, said after the policy, “This is the best time for small depositors to invest in debt products because banks will cut lending rates soon but will wait and watch deposit rates.”

After April, things could be different. Banks will also cut deposit rates, as they will look for avenues to reduce the pressure on net interest margins. But for now, a cut in lending rates looks more imminent.

Choose the right tenure, though. If you have decided to invest in FDs, then it is better to invest for at least three years, says Sunil Mishra, CEO, Karvy Private Wealth. Currently, for deposits of one-three years, State Bank of India offers 8.5 per cent, HDFC Bank 8.75 per cent, ICICI Bank 7.5-8.75 per cent, Axis Bank 8.5-9.3 per cent, Bank of Baroda 8.5-9 per cent and Punjab National Bank 7.5-9 per cent.

According to Mishra, investors can choose from a spectrum of fixed income products. For instance, conservative investors with low risk appetite can look at FDs. Those willing to take a bit of calculated risk can look at non-convertible debentures (NCDs) from non-banking finance companies. High net worth investors can even consider real estate-backed NCDs.

Debt mutual funds score over bank FDs due to better tax treatment. The interest earned from FDs are taxed on your income bracket, while if debt MFs are held for more than a year, the income is taxed after taking into account indexation or, in other words, inflation. So, the effective tax rate is lower. According to data from Valueresearchonline, one-year returns from debt funds have been 10.3 per cent for gilt medium and long term, 10.68 per cent for income funds and 9.95 per cent for short term.

Lakshmi Iyer, head-fixed income and products, Kotak Mahindra Asset Management, says there will be more easing of interest rates and investors should continue to remain invested in fixed income instruments with longer duration. “Our advice would be to invest in debt mutual funds of one year duration or more,” she said.