Wednesday, August 17, 2022

FD Interest Rates on the Rise – Bad or Good?

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Often, we get the news on fixed deposit interest rates. Either they are rising or falling. Many Indian banks offer high-interest rates to all customers depending on the tenure. Since a fixed deposit works both ways, as a savings and investment, have you ever wondered when the right time to open a fixed deposit account is? If yes, here is a detailed guide to decipher the secret behind getting the maximum benefit from a fixed deposit.

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First, let’s understand how fixed deposits work.

A fixed deposit is the best way to do savings since you invest in it to secure a lump sum for a specific period. As you have fixated the amount, the bank uses it for their business and offers you a part of their profit as interest. The fixed deposit interest rates vary depending on the bank, the principal amount, tenure, and the type of pay out. Generally, you tend to get the maximum interest if you decide to keep your money for the long term without withdrawing the interest amount. Generally, compounded interest rates are applicable on cumulative on-maturity interest pay out, and thus they offer maximum benefit.  

Since the fixed deposit interest rates have fallen 40% in the last few years, it is important to keep an eye on when the interest rates rise again. Since the Reserve Bank of India has raised the repo rate by 0.9% in the last few months, it is expected that the FD rates will soon see a hike too.

Quoting the Economic Time’s data about India’s fixed deposit interest rates, “A 90 basis points hike in FD interest rate from 5.5% to 6.4 % means that on each 1 lakh rupee FD for five years, you will get Rs 5,958 additional interest pay out.

This shows how a growing interest rate is a powerful green signal for opening a fixed deposit account.

What to expect when the interest rates are on a hike?

Traditionally, banks apply interest rate hikes that are minimal, and this should not affect when it comes to small investments. However, when the principal amount of the fixed deposit is high, even a small hike in the interest rates can affect it. 

One main reason the banks offer higher fixed deposit interest rates is to attract customers and grow business. Many banks offer introductory interest rates on fixed deposits, but that rate is specifically for a minor fixed tenure. This way, banks build a good customer base, but since the tenure of these fixed deposits with high-interest rates is smaller, banks revise the interest after a few years. 

This is an excellent strategy for someone who wants to invest too. You can choose a bank offering a high-interest rate on their fixed deposit to ensure maximum pay out from a fixed deposit. 

Benefits short and medium tenure FDs

If you are unsure about investing in the long run, a hike in the fixed deposit interest rates can be an excellent time to open a small or medium-term FD account. It allows you to close the account, invest in another bank, or renew the amount. While renewing, you are free to choose the term as per your preference.

In short, when the fixed deposit interest rates are on the higher side, you can choose to open a small or medium-term FD that will give you the flexibility that FDs do not offer otherwise.

FD Laddering

Fixed deposit laddering is a way to divide your principal amount and invest in FDs with different term periods. This will allow you to get the maximum advantage from an FD since you can keep the entire amount with the high-interest rates for the long term. Meanwhile, you can invest in short-term FDs as a flexible fund for your future monetary needs.

Although offering higher fixed deposit rates is a tactic the banks use, this can certainly help you get maximum benefits from a fixed deposit!

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