Bank on deposits
With interest rates bearing north and global economic situation yet to appear clear out of the recession shadow given the further tightening by India and China, the tragedy in Japan and the American attack on Libya, among various other factors, retail investors are finding it hard to find a safe haven to park and grow their money.
Well, here’s the safest bet — fixed deposits of shorter durations, which have already announced themselves as a lucrative option with the banks lining up a slew of them to mobilise funds before the current financial year comes to an end.
Last week, in a frantic bid to domestic increase, the Reserve Bank of India (RBI) increased the repo (rate at which banks borrow from RBI) and reverse repo rate (rate at which RBI borrows from banks) by 25 basis points each. Analysts say RBI may increase rates by another 75 basis points by 2012. This will take the repo and reverse repo rates to 7.5% and 6.5%, respectively.
While going for the hike in rates, RBI pointed out that the risk to inflation remains clearly on the upside arising from domestic fuel prices and higher manufactured non-food products. In fact, in the past one year, private and public sector banks have hiked deposit rates by over 150 basis points across various tenures, and investors are finding it profitable to invest in schemes with short maturity period of less than 180 days.
Taking a step further, some banks have even waived off the penalty clause on untimely withdrawals to boost deposits from retail investors. Analysts say the rise in yields will impact returns of long-term funds because of its opposite relationship with the price of bonds, and that investors should look at longer maturity term deposits once interest rates stabilise.
Fixed deposits have always attracted retail investors as RBI guarantees deposits of up to R1 lakh, which means investors get back the money in case the bank in which they have deposited their money defaults.
Fixed deposits with banks also give tax benefits as investments of a maximum of R1 lakh for a five-year period are eligible for tax deductions under section 80C of the Income Tax Act. However, investors will have to keep in mind that the interest earned on fixed deposits is fully taxable and is added to the annual income of the individual.
Moreover, in tax-saving fixed deposits one cannot go for impulsive withdrawal and these deposits do not have any sweep-in facility. In other words, an investor cannot link such deposits to a savings account and the surplus funds available under the savings account cannot be automatically invested in this type of deposit.
In a rising FD Interest Rate regime, fixed maturity plans (FMPs) in mutual funds are also attracting retail investors for different maturities of ranging from three, six, one to even two years’ lock-in period. FMPs with a maturity of over one year have tax advantage over fixed deposits, as FDs are taxed as per the tax bracket applicable to the individual. Investors in FMPs have an option to pay tax on long-term capital gains at 10% without applying indexation, or 20% after applying indexation. One should consider investing in FMPs only if he is willing to take some risk for tax-efficient returns.
Bekxy Kuriakose, who looks after fixed income at L&T Mutual Fund, says gilt yields are expected to remain range-bound with an upward bias as the market has begun to price in further rate hikes. “Liquid funds are expected to give stable returns in the range of 7-9% and ultra short-term funds and short-term funds may outperform all other categories going into April,” says Kuriakose.
So, with interest rates moving up, fund houses are aggressively launching FMPs and with interest rates expected to inch up further, these products will make a good bet for the risk-averse investor.
Source: [indianexpress]
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