Liquidate your FDs if maturity is far away

Fixed deposit (FD) investors who have been hoping for interest rates to rise are unlikely to have their wish fulfilled in the coming days. At best, there could a marginal rise over the coming year, according to experts.

The good news is that interest rates are not moving southward either, but will be range-bound. “With the current worries on inflation and fiscal deficit, any further rate cut by RBI at this juncture seems less likely. However, aggressive banks that look at improving their lending rates may keep their deposit rates low. We do not expect any significant fall from here on,’’ says Vidya Bala, head of mutual fund research, FundsIndia.

“In the short term overall interest rates in the economy are not expected to fall further,’’ concurs Arnav Pandya, certified financial planner (CFP).

Rates have been in a declining mode for over three years now. Explaining the reason for the rate cuts, Harsh Jain, co-founder & COO, Groww, says, “Banks were flush with funds post-demonetisation. So deposit rates crashed. They are now normalising. So deposit rates could be same or go up in a small way. They may remain constant or go up slightly in next 12 months.’’

Regarding a rate hike, Bala says, “The bulk deposit segment has already seen a marginal increase and we do not think any deposit rate hikes on the retail segment can be expected now.’’ SBI had raised the interest rate for deposits above Rs 1 crore and tenors of at least one year to 5.25% (senior citizens get 50 basis points more across all maturities). However, no change was affected for deposits below Rs 1 crore.

Earlier, on November 1, 2017, State Bank of India (SBI) had reduced the deposit rates from 6.50% to 6.25%. After the rate cut, senior citizens get 6.75%, as compared to earlier rate of 7%.

In such a scenario, going forward, the question arises whether one should continue with investments in FDs or look at alternative investments. “While the ideal situation would be to liquidate FDs and shift to better alternate investment options, it may not be feasible to liquidate the same as they may attract penalties on liquidation before maturity,’’ says Yogita Dand, CFP and life planner.

“Investors should liquidate FDs if the maturity is far, meaning if the FD was started recently. Current interest rates are at their lowest. The alternate option with a similar risk profile can give them 2-3% higher returns with the flexibility of anytime withdrawal,’’ says Jain.

“Investors who had invested in deposits 2-3 years ago will certainly have to contend with reinvestment risk as their deposit matures now, given the lower rates now than a few years ago. For such deposits that are maturing, when there are other options in avenues such as debt mutual funds with superior post-tax returns, investors would do well to move their matured FD proceeds to such options,’’ advises Bala.

One such alternate investment option that is comparable to FDs are the short-term debt mutual funds. “The short-term debt mutual funds can be a good option, especially if held for three years or more, wherein capital gains indexation benefit will also be available. For senior citizens, post office senior citizens' scheme should continue to be a primary option supplemented with short-term debt mutual funds with a systematic withdrawal plan for those seeking regular income,’’ says Bala.

In addition to debt funds, Arnav Pandya suggests “the 7.75% Government of India bonds’’ for good and steady return for investors. “For the 7.75% bond the benefit is that the rate is locked in for seven years, but the negative point is that this is not very high plus it is taxable. Also, if interest rates rise in the economy, then the investor will be stuck with the fixed rate,’’ says Pandya.

Brijesh Parnami, executive director & CEO, Essel Wealth Zone, feels it all depends on your age and your long-term goals. “For instance, if your FD is close to maturity, you can continue with it. Or you can invest in a mutual fund and withdraw money through a Systematic Withdrawal Plan (SWP),’’ says Parnami.

It makes financial sense to tailor your investment strategy to your financial goals. “If you need liquidity in less than a year, then you could continue with FDs. If your time horizon is longer, but you do not want to take too much risk, then one could opt for balanced funds that invest in both equity and debt and give about 10-12% return,’’ says Parnami.

Debt funds have certain advantages over FDs. “You get 1-3% higher returns than FDs and you can withdraw anytime, any amount. The balance money stays invested,’’ says Jain. Besides, there are tax benefits too.

The disadvantage is that certain debt funds are also volatile (risky) and therefore investors need to select a suitable debt fund.

“Most people prefer the tried and tested FDs to mutual funds due to lack of awareness and fear psychosis,’’ adds Parnami.

THE OPTIONS

• Debt funds have certain advantages over FDs. One gets 1-3% higher returns than FDs and can withdraw anytime, any amount
   
• The alternate option with a similar risk profile can give them 2-3% higher returns with the flexibility of anytime withdrawal
   
• For senior citizens, post office senior citizens' scheme should continue to be a primary option supplemented with short-term debt mutual funds