Replace Fixed Deposits With Mutual Fund Schemes

The worst hit by the lower interest rates are investors who had relied on bank fixed deposits to earn interest. The option for such investors is to shift to debt mutual funds. The article explains why

Having made our exit from one of the most traumatic years in recent history, optimism has certainly taken wing after the US election and affirmative news about the vaccine. Even the best of experts could not have predicted what unfolded in the year 2020. The corona virus-induced lockdown and subsequent action by central banks and the government led to a dramatic fall in the interest rate. Between February and May 2020, the apex bank of India cut the key policy rates by 1.4 per cent. The latest comment from the Reserve Bank of India (RBI) head indicates that a lower interest rate is likely to stay here for a while.

The worst hit by such a lower interest rate are investors who had relied on bank fixed deposits to earn interest. Since the start of the year there has been a drastic fall in the fixed deposit rates offered by banks for all kinds of tenure. We see that the interest rate offered by India’s largest bank, the State Bank of India (SBI), has been cut by more than 1.5 per cent for various tenures since the start of the year. For example, the interest rate offered for the duration of 7-45 days has fallen from 4.5 per cent to 2.9 per cent – a decline of 160 basis points. The interest rate for a long duration has fallen less than the short term.

In the same period, the returns offered by mutual fund products have been quite exceptional. Even the returns offered by debt funds have been better than the rates offered by bank fixed deposits with an exception of the credit risk fund. There are 16 sub-categories of debt mutual funds based on the types of instruments they invest in and the maturities of such instruments. For example, overnight funds are those that invest in overnight securities having a maturity of a single day; similarly, liquid funds invest in debt and money market securities with maturity of up to 91 days.