Last year all the banks reduced their fixed deposit rates for almost every period. Currently, according to official inflation figure is above 7 per cent which is a bad news. The prices of almost everything are very high. So the returns from fixed deposits might amount to nothing if the current rate levels continued as all the interest earned will be absorbed by price rises.
According to experts investors, who invested in FDs for security of capital, should think more than safety and add should take some risk to earn real returns.
Currently interest rates being offered by leading banks ranges between 6 per cent and 6.5 per cent on one-year deposits and on Thursday the inflation have touched 7.31 per cent. The retail prices are managed by consumer price index is currently around 12 percent and food inflation is just short of 20 per cent.
Sundeep Sikka, chief executive officer, Reliance Mutual Fund stated, “In the current scenario it is an eye opener as money lying in bank fixed deposits is actually money eroding.”
Although banks are offering 6 per cent interest on a one-year deposit but the return earned gets reduced to below 5 per cent in case it comes in income tax range.
Also, in such case the real rate of return, which is equal to nominal rate less the inflation, turns negative. On the other hand, the BSE’s benchmark stock index, the Sensex has earned a compounded annual return of 23 per cent over five years regardless of serious lows.
“In such a case it (FD) is not even covering one against the rising cost of living,” said Surya Bhatia, a Delhi based financial planner. “Investors should look at instruments that can at least cover them against inflation and start taking a little risk.”
Tuesday, January 19, 2010
Wednesday, January 6, 2010
Fixed deposits come with more benefits
Fixed deposits (FDs) a traditional investment option has been a vital part of every investor’s portfolio, due to assured rate of return. However FDs have been plain vanilla products with no additional benefits attached to it. Now banks, in an era of competition are offering few packaged deals in order to attract more investors. Few of the interesting deals being offered are:
Insurance: Some banks are offering insurance with FDs but the main product will be the same along with additional benefit. But the insurance will be based on the deposit amount and the tenure.
For instance, one of the bank is offering free accident insurance cover worth Rs 5 lakh on a 3-year deposit of Rs 25,000 carrying an annual interest of 8 per cent. This adds the value to the product.
Most of the banks offer accident insurance only. The insurance amount ranges from, Rs 3 lakh and 7 lakh. But the accident cover will have a lot of clauses. Therefore, your overall insurance needs should not depend on such bundled policies.
Floating rate deposit and reinvestment of interest: Mostly FDs are offered at fixed rates for the specific tenure. But some of the banks and non-banking finance companies (NBFCs) offer deposit schemes at floating rate of interest. For instance, HDFC offers floating rate deposit on which the interest rate is given every quarter.
Then some banks have facility of reinvestment of interest amount at the existing rates. For instance you get Rs 2,000 interest every quarter on your deposit, so the bank will make a new FD with this amount at the existing rates.
No penalty: FDs are made for a fixed tenure. In case depositor withdraws before the maturity, the institution charges a penalty. In such a case, the overall return will come down. For instance a FD was made for three years at the rate of 8 per cent and is withdrawn after one year, the rate available could come down to as low as 5 percent.
Some of the banks have products where the rate of interest is not reduced if FD is broken before the tenure. The investors who look for flexibility, such deposits are beneficial for them.
Time period flexibility: Some of us make FD for a particular purpose such as for purchasing an expensive item on child’s marriage. There can be chances that these plans are postponed and the depositor does not require to extend the tenure of his/her investment. In such a case one option is to let the deposit mature and then reinvest it. But there is no surety that you will get the same interest rate in the future or it will be reduced. Therefore some of the banks have started providing FDs where investor is allowed to increase the time period of investment without major changes in other conditions.
Adding and breaking deposits: A large amount of paperwork is involved in case a person makes multiple FDs of smaller denominations. Usually investors who might need money at various stages in future do such investment, so they do not deposit in bulk and then break the deposit.
To solve this problem banks have introduced products where a bulk deposit is divided into deposits of smaller denominations as per investor’s need.
On such deposits investor earn higher benefits. Also, banks offer facility to add investments easily so that administration does not become a very difficult task.
Insurance: Some banks are offering insurance with FDs but the main product will be the same along with additional benefit. But the insurance will be based on the deposit amount and the tenure.
For instance, one of the bank is offering free accident insurance cover worth Rs 5 lakh on a 3-year deposit of Rs 25,000 carrying an annual interest of 8 per cent. This adds the value to the product.
Most of the banks offer accident insurance only. The insurance amount ranges from, Rs 3 lakh and 7 lakh. But the accident cover will have a lot of clauses. Therefore, your overall insurance needs should not depend on such bundled policies.
Floating rate deposit and reinvestment of interest: Mostly FDs are offered at fixed rates for the specific tenure. But some of the banks and non-banking finance companies (NBFCs) offer deposit schemes at floating rate of interest. For instance, HDFC offers floating rate deposit on which the interest rate is given every quarter.
Then some banks have facility of reinvestment of interest amount at the existing rates. For instance you get Rs 2,000 interest every quarter on your deposit, so the bank will make a new FD with this amount at the existing rates.
No penalty: FDs are made for a fixed tenure. In case depositor withdraws before the maturity, the institution charges a penalty. In such a case, the overall return will come down. For instance a FD was made for three years at the rate of 8 per cent and is withdrawn after one year, the rate available could come down to as low as 5 percent.
Some of the banks have products where the rate of interest is not reduced if FD is broken before the tenure. The investors who look for flexibility, such deposits are beneficial for them.
Time period flexibility: Some of us make FD for a particular purpose such as for purchasing an expensive item on child’s marriage. There can be chances that these plans are postponed and the depositor does not require to extend the tenure of his/her investment. In such a case one option is to let the deposit mature and then reinvest it. But there is no surety that you will get the same interest rate in the future or it will be reduced. Therefore some of the banks have started providing FDs where investor is allowed to increase the time period of investment without major changes in other conditions.
Adding and breaking deposits: A large amount of paperwork is involved in case a person makes multiple FDs of smaller denominations. Usually investors who might need money at various stages in future do such investment, so they do not deposit in bulk and then break the deposit.
To solve this problem banks have introduced products where a bulk deposit is divided into deposits of smaller denominations as per investor’s need.
On such deposits investor earn higher benefits. Also, banks offer facility to add investments easily so that administration does not become a very difficult task.
Subscribe to:
Posts (Atom)
