Interest on fixed deposits is on a downward trajectory. By far this calendar year, the Reserve Bank of India (RBI) has cut the repo rate 5 times. There has been a reduction of a total of 135 basis points. A majority of banks such as SBI, ICICI, HDFC Bank have also slashed their FD rates. The State bank of India is now offering an interest of 6.25 per cent across tenures ranging from 1 year to 10 years.
This fall in interest rate can be financially stressful for many, especially people who depend on bank fixed deposits for regular income. These are generally the retired category of people, who will now have to renew their FDs at a lower rate. However, there are some other investment options that investors can look at. For instance, small finance banks offer higher interest rates on FDs as compared to bigger banks, to attract customers.
Here are some other investment options that you can look at:
Small Finance Bank FDs
Small finance banks, such as Utkarsh Bank and Jana Small Finance are seen to offer higher interest rates to attract customers, as compared to bigger banks. For instance, these banks generally offer an interest ranging from 8.50 to 9 per cent on a 1 year fixed deposit.
These banks are covered under the Deposit Insurance and Credit Guarantee Corporation of India and are regulated by RBI, hence, experts suggest investors can opt for these FDs. Note that, interest on FDs is taxable as per the slab rate.
Post office schemes
There are nine long-term schemes available under the post office schemes. These are quite popular among small investors. The interest rates on these small saving schemes are revised quarterly. Popular investments under this scheme include PPF, Post office time deposit, Senior citizen savings scheme, and Monthly income scheme among others.
PPF, a long-term investment option offers guaranteed returns and offers a return of 7.90 per cent, and also falls under the EEE category (exempt, exempt and exempt). The senior citizens saving scheme whereas offers an interest rate of 8.60 per cent, and the national savings certificate offers an interest rate of 7.9 per cent along with a tax break u/s 80-C.
Tax-free bonds are long-term usually issued for tenure ranging from 10 to 20 years tenure. These tax-free bonds are issued by the government, from time to time. The risks of these bonds are lower, as they are issued by government entities.
For those in the higher tax brackets looking to lock-in money for long-term, can look at this option as the interest income is not taxable, hence, these can be a good option. If you want to invest, look out for issues, as they may not be open always.
Investors can look at these two types of mutual funds – Arbitrage mutual fund, and Debt mutual funds. Arbitrage MFs simply put leverages the differential in price between derivative markets and cash. However, for taxation purposes, they are like equity funds.
Debt mutual funds provide indexation benefit, hence the tax outgo of the investor is lowered. One can choose from multiple categories of funds, that suit their risk profile.