Long-term fixed deposits may yield high returns in long-run
By Neelima Shankar
Dec 5, 2008
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Banks are luring customers to park their excess funds with the banks' fixed deposits by offering striking interest rates. However they are emphasizing on fixed deposits with short term maturities in order to escape from giving high interest rates in future when low interest regime is expected to prevail.

For now the banks are offering high interest rates on short term deposits as compared to their long term deposits and this factor is attracting customers to park their excess cash in short term deposits. For instance a 1,000-day fixed deposit with State Bank of India would earn 10% and a three-year fixed deposit which is only 95 days more in maturity would fetch only 9%. This might look strange but banks are following an accurate policy considering the further cuts in policy rates to be announced by the RBI soon.

Reserve Bank of India is likely is cut the key policy rates in the coming few days, following which a low interest regime is expected to prevail and therefore it would not be profitable for the banks to get locked in long term FDs offering high interest rates. Bankers feel that it is rather better to offer increased interest rates at present and block the customer for short term so that they can decrease deposit rates at the time when interest rates fall.

An analyst said, "Interest rates have peaked. Now, they are all set to come down, especially because of the current economic situation. RBI is likely to reduce both repo and reverse repo rates to bring interest rates down to boost growth." However some analysts are doubtful about the reductions but they are agreeing on the view that interest rates will not go up from the current level.

So given a situation like this, an individual is advised to park funds in long term deposits even if the interest rate offered is slightly lower than the short term deposits. Suresh Sadagopan, chief financial planner at Ladder7 Financial Advisories says, "If the customer doesn't need the money for at least three years, he should consider locking their money up."

He further suggests that individuals can also invest in fixed maturity plans (FMPs) because they give better post-tax return. "Today, we have FMPs which have invested a bulk of their portfolio in only certificate of deposits issued by public sector banks. They are safe and can also give you a post-tax return of around 8.5-9.0%,"he says.

"Also, people shouldn't get lured by returns and abandon their asset allocation plan," he added. CEO of an investment advisory firm, Wiseinvest, Hemant Rustagi says "The idea behind asset allocation is to achieve certain objective. For example, if you plan for retirement, you put money in stocks."

"If you take your money out of the market because stocks are doing badly, you may miss your goal. Because when you allocate money to a particular instrument, you also take into account the likely returns and tax efficiency that would help you achieve the goal.

Though rebalancing your portfolio within the same asset class is okay, shifting in and out of different assets should be strictly avoided," added Mr Rustagi.


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