Why you should rush to invest in FDs now

If you are looking to invest in fixed deposits (FDs), you may have to do it without loosing time.

Consider this: Finance Minister P Chidambaram on Wednesday nudged banks to consider lending rate cutsas he looks to stimulate consumer demand. A day later, Reserve Bank of India Governor D Subbarao also did the same. Soon after the minister's exhortation, Bank of India cut its base rate. Canara Bank followed. The bank has said that it will reduce base rate by 30 basis points from Monday. A reduction in base rate means existing borrowers will also benefit from the move as their interest rates will fall.



However, more significant to note in Canara Bank's move is that along with base rate, it also cut interest rates on select maturities of fixed deposits by 50 basis points. This is a signal that other banks may follow suit.

Economically, deposit rates have to fall before lending rates. If this did not happen, banks' margins will be squeezed. So if more banks are going to heed to Chidambaram and Subbarao's advice, we should expect more banks to cut FD rates before cutting lending rates. Moreover, wide belief is that interest rates have peaked and downward isthe only direction they can move. So, this may be a last chance to get any sort of decent returns from FDs.

But the tenor you invest in here matters. Do not invest in short-term FDs, since they will come with a reinvestment risk. A medium- to long-term FD would work out as a better option, which will help you remain invested at a higher rate for a longer duration. So a 3-5 year FD should be a good option. You could look into investing in company fixed deposits as well. Such FDs give slightly better returns than bank FDs, but they do come with slightly higher risk. So be careful to choose only reputable companies with good credit rating.

Updated Date: Dec 21, 2014 03:00 AM

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