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FD vs Post Office PPF, NSC vs NCD vs MF FMP: Best fixed income option before interest rates fall

Priyadarshini Maji
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The Reserve Bank of India (RBI) has recently cut the policy interest rate by 25 basis points (bps). Compared to an average of 2.3 per cent in 2018, the real rate of interest in India is still at a high at 3.4 per cent, with the repo rate at 6 per cent and inflation at 2.6 per cent. Though the RBI has cut the repo rate, the main aspect is monetary policy passed on by the banks. In February also, the RBI had cut the repo rate, which was not fully passed on by banks in terms of equivalent reduction in lending rates. Banks generally revise their lending rates after the rate cut by the RBI.

If you are planning to invest in any fixed income option before interest rates fall, find out their current offerings:

 

Fixed Deposits (FDs)

Bank fixed deposits are one of the most popular and preferred deposit schemes in India. Their safe and secure nature of investment explains the popularity of this investment option. When you invest in an FD, the principal amount is invested at a fixed interest rate, after which you can gain interest on your deposits, which accrues and grows over time. Experts suggest while choosing a bank, select the lender who is offering the highest interest rates, as the higher FD rates, the higher the maturity amount.

The current interest rate offered by bank Fixed deposits:

Bank

<1 Year >=1 to <=2 2 to <=3 3 to <=5

SBI

6.4 6.8 6.8 6.85

HDFC Bank

7.1 7.3 7.4 7.25
ICICI Bank 6.75 7.1 7.5

7.25

Kotak Bank 7 7.2 7.1

7

 

Post Office Schemes

India Post offers nine small saving investment schemes, which are run under the Ministry of Communications. These include the Public Provident Fund (PPF), National Savings Certificates (NSC),) Recurring Deposit (RD) saving schemes, among others, according to indiapost.gov.in. These schemes are popular among customers because of their safe and secure nature and most of them can be started with minimal investment amounts. They also come with various other benefits. For instance, PPF comes with a maturity period of 15 years, along with tax benefit u/s 80C. Every quarter the interest rates are decided by the government.

The current rates offered by Post Office schemes:

Scheme Interest Rate
Post Office Savings Account 4% per annum
Post Office Time Deposit Account (TD) 1st, 2nd, 3rd year 7% pa
4th Year 7.8% pa
Post Office Monthly Income Scheme Account (MIS) 7.3 % per annum (compounded Annually)
Senior Citizen Savings Scheme (SCSS) 8.7 % per annum (compounded Annually)
15 year Public Provident Fund Account (PPF) 8.0 % per annum (compounded Annually)
National Savings Certificates (NSC) 8.0 % per annum (compounded Annually)
Kisan Vikas Patra (KVP) 7.7 % per annum (compounded Annually)
Sukanya Samriddhi Accounts 8.5 % per annum (compounded Annually)
Source – IndiaPost website

Non-convertible debentures (NCDs)

Non-convertible debentures are issued by companies who are looking to raise funds. In a falling interest rate scenario, NCDs let you lock into a higher interest rate for longer periods. Experts suggest NCDs are for investors who want to go for the higher interest rate-bearing instruments. So, they should opt for this investment option as their rates are comparatively higher than bank FDs. For instance, earlier this year Mahindra & Mahindra (M&M) Financial Services and Shriram Transport Finance issued their NCDs and offered interest rate of 9.5 per cent and 9.7 per cent, respectively.

 

MF Fixed Maturity Plans (FMP)

Mutual Fund’s Fixed Maturity Plans (FMPs) are closed-end fixed tenure funds that invest in debt instruments. The tenure of FMPs varies between a few months to a few years. Experts suggest this investment is ideal for investors who look for an alternate investment option for better post-tax returns with minimal interest rate risk. Unlike other open-ended debt funds, these close-ended funds have a fixed maturity period and are not available for subscription on a continuous basis. However, these are market-linked products and they have indicative returns, unlike FDs that offer assured returns.

 

India’s largest public sector lender, the State Bank of India (SBI), has cut its lending rates by a marginal 5 bps across all tenors on Tuesday. From 8.55 per cent earlier, the revised one-year MCLR currently stands at 8.50 per cent. This move will make the home, auto and other loans linked to the benchmark rate cheaper along with FD rates. SBI also reduced the interest rate on housing loans of up to Rs 30 lakh by 10 basis points. The applicable interest rate for SBI housing loans below Rs 30 lakh will range from 8.60 per cent to 8.90 per cent, as against the existing rates of 8.70 per cent to 9 per cent.

Experts believe other banks may also follow suit. Because of this rate cut, NCD rates can also get reduced in the near future. Industry experts say the government can also decrease the rates from the next quarter, wherein Post Office scheme rates can also go down.