In the situation of rising interest rates, investors can now obtain fixed deposit returns that outpace inflation, which was not achievable since April 2022 when the inflation was 7.79%. Thanks to the RBI’s repo rate boost, which has made debt investors fall back in love with fixed deposit products, several banks and NBFCs are now offering returns that not only outperform inflation but also interest rates from small savings schemes. If we use the Shriram Transport Finance Fixed Deposit, as an illustration, regular investors can receive an interest rate of up to 8.25%, while senior citizens can receive up to 8.75%, which is undoubtedly higher than the inflation rate and higher than the majority of well-known small savings schemes like PPF, SCSS, NSC, and others.
If we use bank fixed deposits as an example, HDFC Bank, IndusInd Bank, Yes Bank, and Ujjivan Small Finance Bank recently increased the interest rate on fixed deposits. For deposits maturing in 3 to 10 years, Yes Bank is presently giving the highest interest rate of 6.75% for the general public and 7.50% for senior citizens. IDFC First Bank is giving a maximum interest rate of 6.90% for the general public and 7.40% for senior citizens on fixed deposits maturing in 750 days. IndusInd Bank is giving a maximum interest rate of 6.75% for the general public and 7.50% for senior citizens on fixed deposits maturing in 1 year 6 months to 61 months. While Ujjivan Small Finance Bank offers a maximum interest rate of 8% for older persons and 7.50% for the general public. As an illustration, the aforementioned banks acquaint fixed deposit investors on how to lock in their fixed deposits to receive returns that outperform inflation in the present environment.
But considering the rising interest rates, debt or fixed income investors may confuse about where to invest. Answering the same Mr Abhishek Dev, Co-founder & CEO of Epsilon Money Mart Pvt. Ltd said “What is common between FDs, Debt MFs, RBI Bonds and other Private or Public Sector Bonds are that they all denote some kind of a Loan or a borrowing structure by the respective issuers. In simple terms, a Bonds is a listed and tradable Debt /Loan security. Bonds/Deposits are typically investment vehicles that one would recommend to an investor who likes to take relatively lower risk (as compared to Equities, for example) and focuses more on capital preservation and Income than capital appreciation. Bonds and Fixed Income products are also recommended as diversifiers to investors whose portfolios lean heavily towards equities – to give the portfolio a prudent balance between equity and fixed income.”
“Debt MFs are essentially a pool of bonds as per their investment objectives which aim to provide the returns of the underlying assets and reduce the risk further through prudent diversification. Short Duration and High credit quality funds are typically safer than those with longer duration and /or lower Credit quality. Debt MFs however offer funds across the spectrum – both short and long term. This is one of the best ways to invest in fixed income as we all know Mutual Funds Sahi Hai!” said Mr Abhishek Dev.
He further added that “The risk assessment associated with investing in these instruments and returns thereof are closely linked. The principles of higher the risks higher the potential returns apply the same as in any investment. What gets added here is also the tenure of investments, the longer the maturity period of the investment, for the same issuer, the higher the potential returns.”
By citing some examples of the best debt instruments that investors can consider investing in, Mr Abhishek Dev said “RBI Floating Rate Bonds with about 7 Years maturity are one of the safest debt instruments available since the bonds issued are backed by the RBI and therefore are highly unlikely to fail to deliver the return at the end of the tenure of the bond. Capital Preservation is virtually guaranteed in this case. An FD or a Fixed Deposit comes next, starting with an FD issued by a large PSU Bank (i.e. SBI), followed by those issued by Private banks and Corporate deposits. The logic for which is simple that the stronger the bank and its parent, the stronger their balance sheet, the safer your deposits are. However, that also means that the smaller Private banks or Companies tend to pay a higher rate of interest on the FD to lure investors.”
Increasing bond yields are also welcome news for investors looking for debt investments like RBI Bonds or small savings schemes. The benchmark 10-year bond rate increased by almost 110 basis points between July 2021 and July 2022, from 6.20% to 7.32%. Even though the value of your current bonds may shrink due to rising yields, you can still get interest payments from your bonds until they mature and continue to receive income.
Using bonds as an example, Mr Abhishek Dev said “Am taking direct investment in Bond Markets at the end since the investor needs deep knowledge of the issuer credit quality, market, yields, coupons, interest rates etc before he/she can take the plunge. Remember the old adage of a little knowledge being a dangerous thing. However, for investors who are able to invest larger amounts (usually over INR 1 Million per Bond) and either do have the research capability themselves or are supported by their trusted financial intermediary who can help them with such research could invest a portion of their Fixed Income portfolio directly in appropriate Bonds. Therefore, If the investor has the knowledge of the Market and is well aware of the risks involved and adequate resources, then he/she can invest directly – else the route of Mutual Funds is preferred.”
However, apart from the rising interest rates on fixed deposits, some debt investors might think about investing in government-backed small savings schemes because they offer higher interest rates than fixed deposit rates. A few of the most well-known plans include the Senior Citizen Savings Scheme (SCSS), which offers an interest rate of 7.4%, the 15-year Public Provident Fund Account (PPF), which offers an interest rate of 7.1%, and Sukanya Samriddhi Accounts, which offers an interest rate of 7.6% which is much higher than the fixed deposit rates of SBI even after the recent hike made by the bank.
The most important information to take away from this is that although small savings schemes provide assured returns, interest rates are not fixed because they are determined by the government on a quarterly basis. If we use PPF as an example, the interest rate is currently 7.1%, down from 12% in the 1999–2000 timeframe. Debt investors who compare fixed deposits and post office savings schemes before making an investment selection may become perplexed in the event of rising interest rates.
To mitigate the same concern, Abhishek Dev, said “Among Fixed Income investment options Bank Fixed Deposits remain the dominant option if you go by the savings pattern. The increase in interest rates in the market has transmitted well to loans and market-linked fixed income investment options (i.e. Bonds and Floating rate deposits), though the same in process for most Bank Deposits and Small Savings. Small Savings are reasonably good investment options for retail investors for their conservative part of investments which can be locked in for a longer term- these are a set of savings instruments managed by the government with an aim to encourage citizens to save regularly. However, most small savings investment options come with investment limits and lock-in periods.”
He further added by saying that “Fixed Deposits, while they do come with a maturity period, are easily liquidated if there is liquidity urgency – please note premature withdrawal penalties apply. There are no limits on how much you can invest in FDs. You should also watch out for which bank’s fixed deposit you are buying, typically, the stronger the bank and its parent, the stronger their balance sheet, the safer your deposits are. Both FDs and Small Savings are different in terms of return potential, tax benefits, cap on investment etc. in a scenario where interest rates are rising it is better to invest in a Small Savings Scheme since the interest rate is revised every quarter – unlike an FD where the interest rate is fixed.”
“However – both have their pluses and minuses, and one must invest in instruments that are aligned with your returns expectations and risk appetite. All said, before you do invest in any of these options, do not forget to consider and compare with various Bonds (including Government Bonds) and Debt Mutual Funds which could be comparable and attractive. Some Food for thought!,” said Abhishek Dev.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.