If you used to love your fixed deposits and risk free investments, you probably don’t love it as much anymore because of how drastically interest rates have come down. SBI’s 2 years FD now offers a sad 5.1%, which will probably just about beat inflation. If you want to know what to do now, this post is for you. Before you dig in, we need to calibrate our expectation. We will not be able to make 12% return risk free today – not going to happen. But we can make more than 5.1% and this post will tell you how.
Oh, and have you read our post on how to invest your hard earned money?
Highest interest rates on SB accounts
IDFC and RBL offer the best savings bank account interest rates. The party may not last very long, but let’s jingle and mingle when it is on.
Highest interest rates on FDs
Small finance banks offer you the best chance for gettinghigh interest rates on risk free fixed deposit investments. There are about 10 of them in India and they are relatively less well-known. I provide no guarantee about how safe the banks themselves are. BUT, all deposits in small finance banks as with regular banks are backed by deposit insurance for a maximum value of Rs.5 Lakhs by DICGC. So the first Rs.5 Lakhs you invest are risk free. My suggestion – Limit it to Rs.5 Lakhs if you can with these banks. Apart from them, a couple of mainstream banks also offer higher interest rates as listed below. Rates quoted here are for general citizens, senior citizens get 0.5% more on these quoted rates.
|Bank Name||Max. Interest Rate||FD Duration|
|Jana small finance bank||7.5%||2-3 years|
|Utkarsh small finance bank||7.5%||700 days|
|Suryoday small finance bank||7.5%||5 years|
|North-east small finance bank||7.5%||2-3 years|
|Fincare small finance bank||7.5%||3 years|
|Equitas small finance bank||7.35%||888 days|
|RBL bank||7.15%||3 years|
|IndusInd Bank (PayTM offers this on their app)||7%||1-3 years|
|ESAF small finance bank||7%||2 years|
|NSC (national savings certificates)||6.8%||5 years|
|AU bank||6.75%||2-3 years|
|Post office national savings time deposit||6.7%||5 years|
|Capital small finance bank||6.35%||1-5 years|
|Ujjivan small finance bank||6.5%||1-2 years|
|IDFC first bank||6%||500 days|
Good ol' PPF
Public provident fund carries an interest rate of 7.1% for the 2020-2021 period. The duration of the fund is 15 years and can be extended in blocks of 5 years. Contributions to PPF, interest earned and any withdrawals made after expiry of PPF are all tax free. A maximum of Rs.1.5 Lakhs per annum can be contributed to your PPF account each financial year. Interest rates are subject to change though.
If you have a girl child
If you have a girl child, the government offers the Sukanya Samriddhi account which pays 7.6% interest rate per annum. Partial withdrawal is only possible after your little one reaches 18 years of age and full withdrawal when she is 21. Interest rates are subject to change.
If you are a senior citizen
Senior citizens have it good everywhere. Specifically, these two schemes offer competitive interest rates. Again, interest rates are subject to change.
Bonds and Debt Funds
Bonds are very good alternatives and can some times do better than fixed deposits. But they carry interest rate and credit risk. So, both of them have to be managed. To compare apples with apples, we eliminate credit risk and stick to G-secs (government securities) which have no risk of default.
If you’d like to develop an intuition before investing in them, read below the basics of what influences their returns. If you’d rather not, skip right down to the list below.
Having taken out credit risk, there are 2 key levers that impact how much returns you earn from bonds.
- Actual interest rate movement – When interest rates go up, bond prices go down and vice-versa. In a declining interest rate environment, bond prices appreciate and you typically tend to earn higher returns.
- Duration of the underlying
- The price of longer duration bonds is more sensitive to interest rate movements compared to shorter duration bonds. i.e., when interest rates rise, longer duration bonds suffer a bigger fall in value than shorter duration bonds. This is because of a concept in finance called time value of money. I’ll cover this in another post.
- Longer duration bonds typically offer higher YTM (yield to maturity) compared to shorter duration bonds. (YTM is the rate of return you’ll end up earning should you hold a bond to maturity). This is because interest rates are higher over longer durations.
- In theory, over a particular time period when interest rate (expectations) don’t change, longer duration bonds offer higher returns than shorter duration bonds. This is because of a concept in finance called rolling the yield curve. I’ll cover this on another post as well.
Let’s next form an opinion about which direction the interest rates are expected to move. Inflation, according to RBI, is in control. But economic activity has come down significantly. So the RBI and the government will do everything in their powers to keep interest rates low and stimulate the economy.
Given this background, long duration g-secs offer the best chance of earning returns at par or better than fixed deposits. We can either directly buy g-secs or buy mutual funds that take positions in them. These mutual funds are called gilt funds.
The following are some long duration gilt funds that you could consider investing in.
- Nippon India Gilt securities fund – Direct – Growth
- DSP 10-year G-sec fund – Direct plan – Dividend
- SBI magnum constant maturity fund
Some of these funds are also traded on the stock exchange as ETFs which can provide a lower cost option compared to the mutual fund route. But bear in mind that they are illiquid and trade quite thinly in the bourses. Discuss with your financial advisor before you invest in either of these.
That’s the full round up of fixed deposits and risk free investment avenues. Time to take stock of what your investments are making now?