Turbulent equity climate makes fixed deposits an attractive option

Turbulent equity climate makes fixed deposits an attractive option
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First Published: Tue, Apr 03 2007. 10 52 PM IST
Updated: Tue, Apr 03 2007. 10 52 PM IST
The five interest rate hikes effected during the last financial year have made bank fixed deposits (FDs), with their rising rates, more attractive to investors.
FDs now offer interest rates of up to 11%, for investments made for a tenure of one year or more, which is more than the 9.17% rise in the Bombay Stock Exchange’s (BSE) benchmark index during last year.
Rising rates as well as the risk-free nature of such deposits are once again making the product more attractive to bank customers.
“I am certainly getting more queries asking about fixed deposits,” says Gaurav Mashruwala, a Mumbai-based financial planner. “I think if stock volatility gives people sleepless nights, they should get out.”
With the BSE Sensex seeing big swings—it lost 617 points, or 4.72% on Monday for instance—the tribe of investors intimidated by equity is only growing.
“People want to invest systematically now and want to balance their portfolios, in which case, short-term volatility should not cause worry,” says Hemant Rastogi, a mutual fund expert. “But first-timers who were contemplating stock-market investments are thinking of doing fixed deposits now.”
Data from the Reserve Bank of India shows that FDs with banks grew 24.7% for the fiscal year 2006-07 (till 16 March) compared with a growth of just 14.8% for the 2005-06 fiscal year.
Demand deposits with banks, which include current and savings accounts, grew at just 14.9% for the fiscal year till 16 March compared with 28% for the previous year. Also, 89.76% of the Rs4,98,102 crore bank deposits, for the fiscal year 2007, were FDs. Last fiscal, only 75.26% of all bank deposits were FDs.
“Even the tax advantage of mutual funds may not be able to attract investors any more. Bank deposits are offering risk-free high returns,” says the chairman of a large public sector bank.
And it is not just FDs, but other, more sophisticated debt instruments such as fixed maturity plans (FMPs) and floater funds that are getting more attention.
“While fixed deposit rates are up, the complementary offerings by mutual funds are also doing very well,” says R. Swaminathan, associate vice-president, IDBI Bank Ltd. FMPs—an MF offering that is essentially a relatively flexible FD—are attracting funds. Inflows into FMPs have nearly doubled from Rs45,000 crore four months ago, according to industry estimates.
Such plans typically offer better returns than traditional FDs. But the introduction of the dividend distribution tax in this year’s Budget could hit them hard.
“FMPs are more sophisticated as a product. But the ability to arbitrage between FMPs and FDs has reduced,” says Sapna Narang, managing partner at Capital League, a New Delhi-based private wealth management firm.
Despite their ability to draw investors looking for shelter in a turbulent stock market, not everyone is convinced that FDs will, in the long term, generate greater returns.
“I always tell people to invest for the longer term,” says Mashruwala. “If the stock market gives 50% returns one year, it will correct the next year. While FDs look attractive now, I do think that they will give negative returns, factoring in inflation, over a two-three-year period, barring a spike here and there,” he adds.
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First Published: Tue, Apr 03 2007. 10 52 PM IST
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