Time to lock into Fixed Deposits - Part III

After completing the first two parts on the attractive fixed deposit interest rates currently prevalent in the banking sector, we have been contacted by various people if they could committ into fixed deposits for 3 years for the entire corpus/savings they have.

We have also come across advertisements from banks over the last week or so where the interest have still gone up from the 10.50 - 11.00% bracket to above 11%. This is particularly very evident in the case of private sector banks and makes it all the more enticing.

The rates looks very tempting for lay investors. But at the same time, it is very important to note that the time-frame of the deposit should be decided by the funds requirements of the individuals. Just because a bank offers higher interest rates, the deposits should not be contracted for a longer time-frame. It should be aligned with the individual's funds requirement before the tenure of the fixed deposit is committed. In case you have surplus money which you may not require for a longer tenure, then it makes sense to lock into deposits at higher rates, but at the same time maintain your assset allocation matrix.

One should also remember that Fixed Deposits are only a portion of your investment portfolio and higher interest rates alone should not influence you to have a very high proportion of your investments in fixed deposits. When we take into account the inflation rate of around 8%, and the deposit rate of 11%, technically it means that you are able to get a real effective interest rate of only 3% or so pre-tax. Post-tax, the return would be much lower. Therefore, in order to grow your investments and build the corpus for meeting your future financial goals or retirement, you need to ensure that investments are also channeled to other investment avenues like equity, gold etc.,

The other point to remember is to spread your deposits across different banks with a maximum limit of Rs100,000/- to take advantage of the Deposit Insurance scheme. Though it involves more running between the banks, it may be prudent to do so.

Just for information purposes, few attractive interest rate options which has come up from private sector banks are:

1. City Union Bank is offering 11.30% on 1000 day deposit. Karur Vysya Bank is offering 11% on a 3 year deposit.
2. Standard Chartered Bank is offering 11.00% on 90 days short term deposit.
3. In Chennai, REPCO Bank Ltd., is offering 11.50% on 40 months deposit. But please note that REPCO Bank deposits doesnt come under Deposit Insurance Guarantee scheme.