Fixed deposit rates of interest were at multi-year lows, with banks and non-bank financial companies (NBFCs) slashing rates within the last two years.
When the interest rate cycle does a U-turn from the bottom, short- to medium-term interest rates are usually the first to climb. Long-term interest rates rise more slowly. Some clever tactics can assist FD investors to make the most of the circumstances in such a situation.
Here are some ways that investors might improve the returns on their fixed-income investments.
Long-term and low-interest rates are a horrible combination
If you’re wanting to open a new FD or renew a current one, you should choose a shorter-term deposit, such as one year or less, so that your money isn’t locked in at a lower rate for too long. When short- to medium-term rates rise, you can start raising the FD’s tenure to match.
To avoid the lowest returns, divide and rule
You could be in serious financial trouble if your deposit is due for renewal at a time when the interest rate cycle is near its lowest point.
You can, however, circumvent this by constructing an FD ladder. Simply divide one large FD into smaller FDs and book them for different tenures. It can be done in a way that one FD matures every year.
FDs with a floating rate can be beneficial
Floating rate fixed deposits are now available from several banks and non-banking financial institutions. The rate of interest on such a deposit is connected to a benchmark rate, and it fluctuates in lockstep with that rate.
These are a fantastic option if you don’t want to take any chances with the interest rate cycle and want to invest for the long haul.
A non-cumulative deposit investment option
If you are a senior citizen searching for a reliable source of income, you should consider RBI Floating Rate Bonds. This bond presently pays a 7.15 percent return, which is greater than bank FDs. It has a 7-year term and pays interest twice a year.
Even though elderly persons have superior options such as SCSS and PMVVY, they are not allowed to invest more than Rs 15 lakh in either of these two options.
As a result, the RBI Floating Rate Bond is a viable alternative for older citizens who have reached their SCSS and PMVVY investment limits.
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