Smart things to know: Floating rate term deposits

By Centre for Investment Education and Learning (CIEL)

Floating rate term deposits (FRDs) are a variant of fixed deposits, wherein the rate of interest is not fixed for the entire duration and keeps changing depending on the market rates.

The interest rate is reset with reference to a benchmark rate. Banks offer their base lending rate as the benchmark, and reset the deposit rate on a quarterly basis.

FRDs may be attractive for the retail investors who borrow at floating rates (say, for home loans), but invest at a fixed rate. It ensures that their loans and deposits move in tandem.

Investment in FRDs is also beneficial when the interest rates are expected to rise as it enables the investors to take advantage of periodic increase in the market rates.

On the flip side, since the interest rate is floating, the income from FRDs may be adversely impacted when the rates fall.

The fluctuations in the interest rate component mean that the investment in FRDs may not offer a fixed nominal return.