PERSONAL FINANCE
Banks start hiking the interest rates when policy rates starts to go up.
A fixed deposit or an FD is a financial instrument that banks and non-banking financial companies offer their customers which provide them higher interest rates than a regular savings account. They are considered safe and can be easily liquidated. In the past several years investors saw their returns dropping by 40 percent from the highest interest rate level of 9 percent offered by State Bank of India in September 2014 to 5.4 percent in May 2020.
Earlier investors heavily relied on such financial tools to see their money grow but with changes in certain factors the decadal low FD rates have caused huge financial stress to the citizens.
Fixed deposit was a key investing instrument for senior citizens, who frequently invest their retirement savings in ways that offer low risk and respectable returns. Banks are anticipated to pass on the benefits to consumers as a result of the Reserve Bank of India's (RBI) increase in repo rates to control the inflation. The banks raise interest rates on FDs whenever policy rates start to rise.
Below are some different techniques on how investors can take advantage for higher returns:
Investing in short or medium term FDs:
It has been observed when the interest rate cycle is turning higher for a longer period then short and medium term FD interest rate responds quicker. Long term FDs are exposed to the risk of substantial fall in value because of increasing rates of interest so, it's better to avoid long term FDs because you may miss out the benefits of rising interest rates.
The suggested strategy can be helpful in many ways. short-term bonds are less risky for holding until maturity as they offer lower interest rates in comparison to long term bonds.They are less sensitive when the price drops and get easier to sell when the rate rises.
Opt for Fd ladders:
Bond ladder is a good strategy to ensure high return wherein you purchase bonds with different maturity periods. Investors can better manage their exposure to interest rate risk by purchasing short- and medium-term bonds with a range of maturities. It provides an opportunity for the investors to take the benefits of the rising rate of interest.
Maintaining the ladder requires reinvestment of maturity bonds into new bonds that have maturities for maintaining the target balance. This may help to alleviate the risk while purchasing.
Expand your new fixed deposit investments:
When interest rates go up, not only banks hike their interest rates but the rate of company FDs are also increased. For better average rates, diversifying your investment into banks can be a good option and can ensure higher returns of investment.
Diversifying new FD investment requires your own diligence which might lead to higher interest rates.
Floating rate FDs:
Floating rates have variable interest rates which are provided by few lenders. It can be reset at a regular time interval. Floaters can eliminate the risk related to the rate of interest if they switch from traditional fixed income investment.
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