BANK FDS IN THE CURRENT SCENARIO

For those of you who have been stashing away your savings in the safe haven of fixed or bank term deposits, the good times are coming to an end. Interest rates being offered by banks on their term deposits are tumbling and tumbling rapidly, in response to rate cuts unleashed by the RBI over the past two months. Company FDs are very likely to follow suit.

Most large banks have slashed their term deposit rates by anywhere between 0.25 and 1 per cent at the turn of the New Year. They aren’t done with the pruning yet!

The second round of “stimulus” measures announced last week, suggests that further cuts in term and fixed deposit rates are round the corner. That makes this an opportune time to lock into deposit options that still offer attractive rates for a 2-3 year tenure. If you have surplus cash idling in your savings account, we flag a few options, depending on how long you can stay invested.

2-3 years


If you can stay invested for a 2-3-year timeframe, the Sundaram Finance FD remains an attractive option, offering an interest rate of 11 per cent per annum for both two and three year terms. Bank term deposits (even safer, as up to Rs 1 lakh is protected by deposit insurance), offer 10.5-11.30 per cent for similar terms. Here, while PSU banks led by SBI have brought down their interest rates to 9 per cent (for the 1000-day window), select smaller banks offer higher rates.

The City Union Bank 1000-day deposit (current rate 11.30 per cent, set to come down to 10.80 per cent) is an attractive option. Lakshmi Vilas Bank currently offers 11 per cent (expect a revision!) for this window, while Karur Vysya Bank offers 10.5 per cent.

1-2 years


For the 1-2 year deposits, interest rates range from 8.5 per cent (SBI) to 10.75 per cent (offered by DBS Bank). ING Vysya Bank offers 10.5 per cent and ICICI Bank now offers a maximum interest rate of 9.75 per cent for specific terms of 390 and 590 days.

Short-term deposits


Interest rates for periods less than a year have fallen quite sharply and now hover in the 7.25-8.5 per cent range. In fact, given the fairly wide gap between interest rates for less than one year and one year-plus deposits, investors should consider staying for one year-plus terms as they may fetch substantial incremental returns.

For the less than a year category, ING Vysya’s 111-day deposit offering 10 per cent and ICICI Bank’s special 190-day deposit offering 9.75 per cent are the high yielding options.

Finally, a few caveats:

Given that the interest received on FDs or bank deposits are taxable, investors in the 20 or 30 per cent tax brackets should factor in the lower post-tax yield while making the decision to invest.

Do keep some portion of your savings liquid (say, 3-6 months requirements), to tide over difficult times on the employment front.

Don’t sweep all your savings into fixed deposits in a fit of risk aversion, as that would deprive you of all other investment opportunities over the next 2-3 years.

If you are young, you do need to have an equity portion to your portfolio, to meet your long-term goals.