- Date : 10/01/2023
- Read: 3 mins
Whether to invest in FDs now or later
Fixed deposits (FDs) are quite popular among investors as they offer guaranteed returns on investment and are safe from market volatility. Moreover, since last year, the Reserve Bank of India (RBI) has hiked the repo rates by 225 basis points or 2.25%. Following the hike in repo rates, FD interest rates have also jumped. Many leading banks hiked their FD rates by 130 to 195 basis points. Given the increased rates, is it the right time to invest in FDs?
The concept of real returns in FDs
Fixed deposits give guaranteed interest rates. The rates do not change with a rising market or with rising inflation. So, you need to figure out the real return from the FD.
The real return is nothing but the return after adjusting for inflation. For instance, if a one-year FD offers a 5% interest rate and the annual inflation rate is 4.5%, you are gaining a 0.5% real return from the FD. This means that, after factoring in inflation, your deposit will leave behind a positive return on investment.
Thus, FDs make sense when the real return, i.e., the excess of FD returns over inflation, is a positive value. On the other hand, if the inflation rate is higher than the FD returns, you will lose out. Thus, in such cases, FD investments are not feasible.
Related - Here's how to maintain your purchasing power in rising inflation
Bank FDs v/s NBFC FDs
Compared to banks, NBFCs have been seen offering a higher interest rate on their FDs. Also called corporate FDs, these NBFC FDs have become popular and can offer you attractive returns on investment.
Further rate hikes
In an effort to curb inflation, the RBI might increase the repo rates further in the upcoming monetary review. If that happens, the FD rates might also increase.
So, if you consider the real returns from FDs and choose corporate schemes, you can invest in fixed deposits. However, if you expect the FD interest rates to rise further after a further hike in the repo rate, you can wait for another month and then invest.
Things to keep in mind
When investing in FDs to lock in on the rising interest rates, here are some things that you should keep in mind:
- Maintaining a liquid fund
While investing in FDs, do not put all your disposable income into them. Maintain a liquid fund for emergencies. You can also choose to invest in multiple FDs with varying maturities. This is called laddering. This will help you cash in on short-term FDs while the long-term deposits will stay invested.
- Checking FD ratings
When investing in corporate FDs, check their credit rating. A rating or AAA or AA is recommended as it shows low credit risk.
- Tax implication
5-year bank FDs offer tax benefits on the invested amount under Section 80C of the Income Tax Act of 1961. Thus, if you choose such FDs, you can claim a deduction of up to Rs.1.5 lakhs on your taxable income and save tax. Also, the FD interest will be taxed in your hands unless you are a senior citizen, so interest up to Rs.50,000 will be allowed as a tax-free income under Section 80TTB.
So, assess the available FDs in the market basis their returns, credit rating and other aspects. Then you can invest or wait for further rate hikes depending on your financial needs.
Related - Check out which NBFCs are offering higher interest on their FDs
Fixed deposits (FDs) are quite popular among investors as they offer guaranteed returns on investment and are safe from market volatility. Moreover, since last year, the Reserve Bank of India (RBI) has hiked the repo rates by 225 basis points or 2.25%. Following the hike in repo rates, FD interest rates have also jumped. Many leading banks hiked their FD rates by 130 to 195 basis points. Given the increased rates, is it the right time to invest in FDs?
The concept of real returns in FDs
Fixed deposits give guaranteed interest rates. The rates do not change with a rising market or with rising inflation. So, you need to figure out the real return from the FD.
The real return is nothing but the return after adjusting for inflation. For instance, if a one-year FD offers a 5% interest rate and the annual inflation rate is 4.5%, you are gaining a 0.5% real return from the FD. This means that, after factoring in inflation, your deposit will leave behind a positive return on investment.
Thus, FDs make sense when the real return, i.e., the excess of FD returns over inflation, is a positive value. On the other hand, if the inflation rate is higher than the FD returns, you will lose out. Thus, in such cases, FD investments are not feasible.
Related - Here's how to maintain your purchasing power in rising inflation
Bank FDs v/s NBFC FDs
Compared to banks, NBFCs have been seen offering a higher interest rate on their FDs. Also called corporate FDs, these NBFC FDs have become popular and can offer you attractive returns on investment.
Further rate hikes
In an effort to curb inflation, the RBI might increase the repo rates further in the upcoming monetary review. If that happens, the FD rates might also increase.
So, if you consider the real returns from FDs and choose corporate schemes, you can invest in fixed deposits. However, if you expect the FD interest rates to rise further after a further hike in the repo rate, you can wait for another month and then invest.
Things to keep in mind
When investing in FDs to lock in on the rising interest rates, here are some things that you should keep in mind:
- Maintaining a liquid fund
While investing in FDs, do not put all your disposable income into them. Maintain a liquid fund for emergencies. You can also choose to invest in multiple FDs with varying maturities. This is called laddering. This will help you cash in on short-term FDs while the long-term deposits will stay invested.
- Checking FD ratings
When investing in corporate FDs, check their credit rating. A rating or AAA or AA is recommended as it shows low credit risk.
- Tax implication
5-year bank FDs offer tax benefits on the invested amount under Section 80C of the Income Tax Act of 1961. Thus, if you choose such FDs, you can claim a deduction of up to Rs.1.5 lakhs on your taxable income and save tax. Also, the FD interest will be taxed in your hands unless you are a senior citizen, so interest up to Rs.50,000 will be allowed as a tax-free income under Section 80TTB.
So, assess the available FDs in the market basis their returns, credit rating and other aspects. Then you can invest or wait for further rate hikes depending on your financial needs.
Related - Check out which NBFCs are offering higher interest on their FDs
