Fixed deposits: Should FDs be your next investment destination? Here’s what top experts say

In the times of increasing interest rates, risk-averse investors in search of assured returns find fixed deposits (FDs) extremely appealing. 

Throughout 2023, the Reserve Bank of India (RBI) has consistently raised interest rates as a measure to counter inflation. This results in heightened borrowing costs, encouraging both individuals and businesses to increase their savings, consequently driving up interest rates on savings instruments such as FDs. The escalation of global economic uncertainties and geopolitical tensions also plays a role in the upward trend of interest rates, as investors actively seek secure havens for their funds.

In 2024, a significant number of individuals are contemplating FD investments, anticipating additional interest rate hikes. While this perspective holds merit, it's worth noting that there is no indication or information regarding a potential increase in FD rates.

The recent decision by the RBI to temporarily halt repo rate hikes holds significance for individuals aiming for increased FD rates in 2024. The series of consecutive repo rate hikes from May 2022 to February 2023 had a substantial effect on FD rates. Elevated borrowing costs from the RBI prompted banks to raise their lending rates, consequently leading to higher FD rates as an incentive to attract deposits. Additionally, the surge in inflation compelled banks to offer elevated FD rates to uphold the real return on investments for depositors.

Benefiting from higher interest rates

Numerous small finance banks (SFBs) in India are currently presenting appealing FD rates that surpass eight percent, and in specific cases, even reach nine percent for particular tenures and deposit amounts. This stands in contrast to the interest rates provided by larger banks or conventional savings accounts.

While the upswing in FD rates from major banks might have come to an end, the possibility of a select few banks raising FD rates cannot be entirely ruled out. This has prompted numerous potential investors to question whether the present moment is opportune for securing a portion of their savings in FDs.

Priyadarshini Moreshwar Mulye, a SEBI-registered Investment Advisor and Founder, ARTHA FinPlan, shared, “At present, one may look for FDs for goals like creating a contingency fund and earning a fixed income. For example, a short-term FD can be aligned with a contingency fund. Investors especially senior citizens can invest in for their fixed income requirements. However, one should note that FD investments up to ₹5 lakhs only are insured under DICGC. Suitable diversification, own risk appetite, goal and tenure should be considered while investing.”

Discussing the recent upward trend in FD interest rates in India, experts point out that while there has been an increase in recent months, the rates are not yet at their historical peak. Viral Bhatt, Founder, Money Mantra, says, “Inflation in India is currently high, at around 6.8 percent. Fixed deposit interest rates should ideally be higher than inflation for your investment to provide real returns. While current rates are higher than inflation, you might want to compare them to potential future rates before locking in your money for a long period.”

Assessing risk profile important 

One cannot afford to keep their money tied up in traditional deposits, notwithstanding how a sudden emergency may trigger redeeming these deposits midway. Bhatt explains, “Assess your need for access to the invested funds. Fixed deposits typically have lock-in periods, and early withdrawals often incur penalties. If you may need the money in the near future, a more liquid investment might be better. Apart, you cannot ignore your appetite for market-related risk. So, if you are not comfortable with market volatility, fixed deposits might be a good option for you.”

Rishabh Parakh, Chief Play Officer, NRP Capitals, explained, “Whether to invest in FDs or equity or gold or any other investment products and specially at this time or any time in fact should always be decided based on one’s risk profile; financial goals and overall asset allocation, we can never decide as a blanket rule. So, align it to your goals, look at your asset allocation, and decide should you need a fixed allocation and then whether FD or debt or other debt installments that fit the bill.”

Debating on whether FD investments are worth considering for investors serious about securing their finances for the long haul, Bhatt added, “Consider other investment options with potentially higher returns, such as mutual funds, equities, or gold. However, these options also carry higher risk compared to fixed deposits.”

Rethink your FD investments 

Avoid hastily investing your money in FDs amid the current chaos. Instead, explore the market for the most favourable interest rates. Various banks and non-banking financial companies (NBFCs) provide different rates, so compare your options. Select a term that aligns with your financial goals and evaluate how long you can comfortably commit your funds. It's advisable to invest only a portion of your savings. Diversifying your portfolio is crucial for effective risk management.