Adhil Shetty's Column

Time to close that FD; here are better options

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As we discussed on these pages last month, interest rates have been trending downwards over the last two years. This is great for anyone repaying a loan, as their interest outgo would be reduced. However, it’s also a dampener for anyone investing in fixed income instruments such as bank deposits.

Fixed deposit yields have reduced from around 8-9% per annum 2-3 years ago to 6-7% now. State Bank of India recently slashed rates by 50 basis points on its term deposits. Their two and three year deposits will now earn 6.25% per annum and 6.75% per annum for senior citizens. Also, note that returns on an FD are taxable.

This means that if you’re depositing Rs 100,000, you may earn Rs. 6250 as interest in a year. But if you’re in the 30% tax slab, your post-tax returns are just Rs. 4375, which is not appealing to the discerning investor who seeks more.

The decline in interest rates is not all bad news. Inflation remains under control. As per the latest reports, cost inflation in April had declined to 2.99%. This means that depositors are still earning well above this rate. This is a much better situation to be in than earning 8% when the inflation rate is 9%.

Yet, in terms of wealth creation, you can get much better deals out there than having to settle for paltry post-tax returns of 4-5%.

Let’s divide your deposit needs into short, medium and long term. Here are some alternatives you can seek.

A: Short Term

Fixed deposits help you maintain liquidity and provide instant redemption during an urgent need. You should continue to meet your short-term needs.

Small Bank Deposits: