Worried about falling interest rates!

Concerned about the FD rate’s drop? Here are four possibilities.

Fixed deposit interest rates were already falling, and major banks have reduced their FD interest rates still again.

SBI, HDFC Bank, and Kotak Mahindra Bank have all reduced their fixed deposit interest rates. SBI has slashed the interest rate on fixed deposits by 50-75 basis points from 45 days to 10 years.

This rate cut follows the Reserve Bank of India’s reduction in the repo rate (RBI). Since January 2019, the RBI has lowered interest rates by 75 basis points. One basis point, or bps, equals a hundred percent.

Fixed deposits are Indians’ preferred method of saving. Now, the drop in the FD interest rate has impacted FD consumers, particularly the retired and those approaching retirement. As a result, looking for better alternatives to bank FDs has become a need.

Here are some investing choices that may be beneficial in the current environment.

FDs from small financing banks

Bank FDs pay lower interest rates than smaller finance institutions. These banks are regionally focused and may not have the same national reach as major banks. Small banks rely on consumer deposits to increase their loan portfolio. As a result, some banks, unlike others, provide higher interest rates

to entice consumers. For example, Jana Bank pays 6.75 percent interest on one-year savings, whereas SBI pays 5.50 percent on one-year fixed deposits.

Many people are hesitant to put their money in these institutions. Deposits of up to Rs.1 lakh at these institutions, however, are guaranteed. This is comparable to what other large banks have done. Before starting an FD with these banks, it is a good idea to do some research.

Time deposits at the post office

The post office pays a somewhat greater interest rate on time deposits than banks do. For example, the interest rate on 1-to-3-year PO time deposits is 5.50 percent, which is greater than big banks’ rates. The post office is offering 6.7 percent on 5-year FDs, while SBI is offering 5.5 percent. Additionally, both the money and interest generated on post office savings deposits are guaranteed by the government. Post office FDs are reviewed every quarter, but bank FDs adjust their rates as and when they see appropriate.

FDs issued by businesses or non-banking financial institutions

On their FDs, several non-banking financial organisations and other businesses provide attractive interest rates. These corporate FDs pay out 1-3 percent more than bank FDs. The greater interest rate, however, comes with a bigger risk. Company FDs are not insured, hence there is a possibility of default. It will be difficult to get your money back if the company goes bankrupt and is unable to pay the principal and interest. As a result, conduct due diligence or seek advice from a financial professional.

Debt funds

Debt funds have been in the headlines recently for a variety of reasons. Many investors have expressed concern about the falling returns. Having said that, of all the bank FD alternatives, debt funds is a strong candidate. It’s because debt funds can produce higher actual returns while also being tax efficient. After deducting the inflation rate, real returns are the returns on an investment product. With a bank FD rate of 6.5 percent and a 3 percent inflation rate, the real rate is only 3.5 percent. And if you’re in the highest tax band, your real rate will drop much more.

Debt funds have historically outperformed bank deposits in terms of returns. In addition, debt funds provide indexation benefits. This means that gains are taxed at the current year’s inflation rate. Gains that have outpaced inflation are subject to taxation. This aids in obtaining higher real returns. It should be emphasised, however, that fund houses do not guarantee stable returns or capital security.

These were some of the investing possibilities that you had. Your financial advisor can assist you in making the best decision.

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