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These alternatives can give you better returns than bank fixed deposits


Private sector lender HDFC Bank has joined other big banks in reducing the interest rates on fixed deposits (FDs). Now, its FD rates are similar to that of the State Bank of India (SBI).

FDs from major banks are now fetching investors rates below 6%. But there are a few options where depositors can still make up to 1-1.5% higher returns. “Investors must keep in mind that they should diversify their FDs just like any other investments,” said Suresh Sadagopan, Founder, Ladder7 Financial Advisories.

Investors can use a mix of government-backed traditional fixed income instruments and deposits of reputed small banks and non-banking finance companies (NBFC) to increase the overall returns of their FD portfolio.

Safer options

The FD rates between one and five years from SBI, Bank of Baroda, HDFC Bank and ICICI Bank are between 5% and 5.35%. The rates of FDs over five years range between 5.3% and 5.5% for these banks.

If an investor is looking at higher interest rate with some safety, he or she can look at FDs from India Post and Reserve Bank of India’s (RBI) floating-rate savings bonds 2020 (taxable). India Post FDs up to three years is at 5.5% and five-year return is at 6.7%. The RBI bond has variable interest rates. But at present, the rates are 7.15%. The rate changes twice a year–on 1 January and 1 July.

Better returns with more risk

Apart from the India Post and RBI bonds, an investor can also look at other options that are considered safe but don’t have a sovereign guarantee. One such option is to look at FDs of NBFCs that have a higher ratings, especially for shorter tenures.

HDFC Ltd, for example, has a special deposit of 33 and 66 months that come have interest rates at 6.05% and 6.25%, respectively. The 22-month FD is at 6%.

Bajaj Finserv accepts a minimum deposit of 25,000. For tenure between 12 months and 47 months, the rates are in the range of 7.6-7.7%.

Similarly, investors can look at deposits of small finance banks, which RBI governs. Ujjivan Small Finance Bank offers 6.5% rates for deposits between one and two years. Jana Small Finance Bank has 7.5% rate for deposits between two and three years. Equitas Small Finance Bank offers 7.1% rate for tenure between one year and 18 months and a special deposit for 888 days that is at 7.35%.

Build a portfolio

Investors must diversify their FD investments across different institutions. If you have limited funds, stick to safer options. But if you are looking to invest a significant portion of your corpus in FDs, then you must diversify.

When it comes to investing in options that don’t have a sovereign backing, don’t go overboard due to attractive interest rates, and invest for a short tenure (below three years) in such options. RBI now has deposit insurance of 5 lakh for banks. Don’t invest more than this amount with small finance banks. “Of the total funds earmarked for FDs, an individual should not put more than 20-25% in FDs of small banks,” said Sadagopan.

Senior citizens also have other options that they should at. There’s Senior Citizen Savings Scheme (7.4%) and Pradhan Mantri Vaya Vandana Yojana. For the latter, the interest varies between 7.4% and 7.66%, depending on whether the senior citizen opts for monthly, quarterly, half-yearly or yearly pension.

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