Interest Rates Likely To Fall, Invest In FDs For Short Term, Ladder Investments

Fixed deposit (FD) rates will remain stable so long as the Reserve Bank of India (RBI) does not reduce the repo rate. Once the repo rate begins to fall, FD rates will begin to fall as well.  

Customers can expect that their rates are going to remain as is in the near term. However, once the rates begin to fall in another quarter or two, FD returns may not be as lucrative as they were before.  

So should you lock your money in FDs while the rates are still high? 

Says Raj Khosla, founder and managing director (MD), MyMoneyMantra.com, “In a declining interest rate scenario, you should lock in funds in long-term FDs with banks that are offering the highest rates in the market.” 

However, investors should look at their investment horizon and goals before locking their money in long-term FDs in a declining interest rate scenario. 

“Inflation could rise during the long holding period which could reduce the real value of their holding. So, they should weigh this and if they can hold it for the long term, then it’s advised to diversify their investment into a mix of safe assets like FDs, as well as growth assets like equity so that they can target to beat inflation during the long holding period,” says Abhishek Kumar, a Securities and Exchange Board of India (Sebi) registered investment advisor (RIA), and founder and chief investment advisor of SahajMoney, a financial planning firm. 

In fact, FDs are a good investment option only if you are looking to invest for a short term. “If you are looking to save your funds for a period of less than 2-3 years, then FDs can be one of the safest and the best ways to ensure returns along with capital protection. So for the short term, FDs will continue to be great option, but if you are investing for the longer- to mid-term, you may need to look at other alternatives,” says Adhil Shetty, CEO, BankBazaar.  

If you are looking at long-term debt investments, you may want to consider a Public Provident Fund (PPF) or the Employees’ Provident Fund (EPF), both of which have higher returns.  

“If you are a senior citizen, you can look at Senior Citizen Savings’ Scheme (SCSS) as well. Make sure to look at the taxation norms for all of these before investing,” says Shetty.  

Ladder Your Investments 

Laddering spreads the investment across FDs maturing at different times, thus reducing the risk associated with interest rate fluctuations and providing regular income streams.   

Says Shetty, “It provides regular liquidity and income over time, reduces the risk of reinvesting the entire corpus at lower interest rates, and offers a balance between short-term and long-term rates.”