SBI hikes FD interest rates by up to 20 bps for these tenors

Here are the top banks offering highest interest rates for senior citizen fixed deposits (FD) for two-year tenure. (The rates are as on June 9, 2022)

Bandhan Bank, DCB Bank, IndusInd Bank and RBL Bank offers interest rate of 7 percent to their senior citizen customers. These interest rates are compounded quarterly and Rs 10,000 will grow into Rs 11,488.82. IDFC First Bank offers an interest rate of 6.4 percent and Rs 10,000 will grow into Rs 11,376.39 in the span of two years.

While a rate hike is good news for depositors, it also brings with it a slew of questions. Despite the fact that interest rates are now moving in the opposite direction, no one knows where they will eventually peak or how long it will take. If you wait longer to book your FD for a higher rate, you will lose out on current rising rates, and if you book long-term FDs after only a few rate hikes, you may lose out if rates continue to rise in the future.

If you're trying to book a long-term FD or a large FD that needs to be renewed, now might not be the best moment. In a rising rate environment, it is preferable to invest in short-term FDs so that you can benefit from the rate increase during the investment period. As a result, booking a 6-month to one-year FD could be a better option. You can book longer-term FDs whenever these FDs mature and you earn a better rate at renewal.

It is better to create a FD ladder as it can be a viable alternative because it allows you to divide a large deposit into multiple parts and book each part after a period of time to get the average return and periodic liquidity when interest rates are volatile. It is, nevertheless, critical to select the correct deposit tenure and frequency. In a rising rate environment, maintaining the tenure and gap between deposits short is critical to ensuring that the deposit benefits from rapidly rising rates at maturity. To build a stable ladder, gradually increase these tenors.

If you have Rs 10 lakh, you can open a Rs 2.5 lakh FD for six months, a Rs 2.5 lakh FD for nine months, and so on. When your first FD matures, you can extend the tenure to two years, and when your second FD matures, you can extend the tenure to two years and three months, and so on. Increase the duration to 3 years and the gap between the two FDs to 9 months once these FDs begin to mature.

DCB offers the best rate for 5 year bank fixed deposit, as of now it offers 6.60 and quarterly compounded return of 10,000 will be Rs 13872.27. Indusind Bank is offering 6.50 percent and quarterly compounded return of 10,000 will be Rs 13804.20. RBL Bank is offering interest rate of 6.30 percent and quarterly compounded return will be Rs 13669.00. IDFC First Bank and Karur Vysya Bank offer interest rates of 5.25 percent and 5.89 with quarterly compounded returns of Rs 13635.39 and 13336.47 respectively. (These interest rates are as on June 9, 2022.)

Distribute the amount of your FD over several years. Investing in FDs should be done in a 'laddering' way to minimise reinvestment risk and ensure liquidity. Instead of booking one large FD for the long term, you break it into parts when making an FD ladder. In a ladder, the amount is divided into smaller FDs, which are then booked one by one after an interval of 3-5 years, from the first to the last. With such a large gap between the first and last, your prospects of getting the best rate on your FD will be high.

Each bank customer is eligible for insurance up to a maximum of Rs 5,00,000 for both principal and interest amounts held in the bank if the bank license is cancelled or during liquidation as under Deposit Insurance and Credit Guarantee Corporation (DIGCC).

The excess money in the savings account is automatically moved into the fixed deposit whenever the amount in the savings account exceeds that stated limit. Your savings account balance will earn a higher rate of interest than if it were in a regular savings account.

According to HDFC Bank, “When you apply for the sweep-in facility, what the bank really does is, it breaks up units of the specified FD in units of Rs. 1. In doing this, it makes sure funds are available in your sweep-in Savings or Current Accounts, whichever is linked. With this, cheques or any other debit transaction from your account is not hindered due to lack of sufficient funds in your Savings/Current Account.”

Good days are finally here for fixed deposit (FD) investors as banks and other financial institutions have started to increase FD interest rates, albeit marginally.

A 90 basis points of hike in FD interest rate from 5.5% to 6.4 % means that on each 1 lakh rupee FD for 5 years you will end up getting Rs 5,958 additional interest payout.

Usually, it is the long-term FD that can see a higher increase in the interest rates compared to the short term at this stage. As the interest rate increases, we will continue to see these FDs offering better rates.

Making an FD ladder helps you to break a big deposit into many parts and book each part after a time gap so that you get the average return and periodic liquidity when there is volatility in the interest rate. One can follow this concept very well for their contingency funds if they keep them parked in the bank account or FDs.

Laddering FDs for the short term will give you periodic liquidity as well as the ability to move to a higher interest rate when you reinvest on maturity. So, booking short-term FDs and then reinvesting them for longer terms over the next few months would be a wise strategy.

Here is an example. If you have Rs 10 lakh you can the first FD of Rs 2.5 lakh for six months, then a second FD of Rs 2.5 lakh for 9 months and so on. Once your first FD matures you can increase the tenure to 2 years and after that once the second FD matures you can keep the tenure 2 years 3 months and so on. Once these FDs start maturing you increase the tenure to 3 years and increase the gap between the two FDs to 9 months.

The idea remains to keep the tenure short at present and increase the tenure with time as the interest rate increases. (Text by Naveen Kumar/ET Online)