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Business News/ Money / Personal Finance/  As markets stay muted, is this rational to switch to fixed deposits?

As markets stay muted, is this rational to switch to fixed deposits?

Both Nifty50 and Sensex have declined by 1.7 percent in the past nine months whereas interest rates on fixed deposits (FD) have been on a rise in line with the repo rates. Read further to know whether investing in fixed deposits is a rational move.

FD rates have been rising to align with repo rate that rose by 50 basis points on September 30 to its present level of 5.9 percentPremium
FD rates have been rising to align with repo rate that rose by 50 basis points on September 30 to its present level of 5.9 percent

When two key benchmark indices have delivered negative returns to investors in this calendar year so far, investors are compelled to explore beyond the tried-and-tested earning potential of equity. 

Among the safe alternatives, one can think of debt funds, small saving instruments such as PPF, post office deposits and fixed deposits by commercial banks.

NSE Nifty50 has declined from 17,625 points on January 3 to 17,320 on October 6 this year, giving a negative return of 1.7%, whereas BSE Sensex 30 slipped from 59,183 to 58,183 during this period, giving a negative return of 1.7 percent.

On the other hand, fixed deposit rates of banks have been on a rise ever since the banking regulator Reserve Bank of India (RBI) started raising the repo rates early this year.

In the past four monetary policies, the banking regulator has raised the repo rates by 190 basis points. The RBI raised the repo rate by 40 basis points in May and 50 bps each in June and August. As recent as September 30, repo rate was raised by 50 basis points to bring it to its present level of 5.9 percent. Following this, ICICI Bank raised its FD rates.

In the month of August alone, seven banks raised their fixed deposit rates. These banks were Canara Bank, ICICI Bank, Indian Bank, Bank of Baroda, DBS, Fincare Small Finance Bank and IDBI Bank.

Are FDs the right way to go for?

Financial experts, however, believe that it is not yet the time to choose FDs over equity. Also, they believe that it is not fair to see any investment instrument unilaterally.

“Most financial products are neither universally bad nor universally good – it’s always context specific. It is no different when it comes to FDs. For a risk conservative investor, the stability of having money in FD gives them the confidence of investing in volatile equities. Also, FDs are a perfectly sound investment option to hold short term funds, or, to take refuge from market volatility," says Ravi Saraogi, a SEBI registered investment advisor and co-founder of Samasthiti Advisors.

He further asserts that those intending to invest for longer than three years should prioritise debt mutual funds over fixed deposits.

“For short term investments of lower than three years, the taxation between debt mutual funds and FD is similar. For investment horizon of more than three years, debt mutual funds have an edge over FDs due to lesser taxation," he adds.

On the other hand, Nitin Rao, head of products and proposition, Epsilon Money Mart, believes that instead of abandoning equity, one should use this as an opportunity to buy on dips.

“Investors who wish to take equity exposure should eye the market volatility as an opportunity to buy at lows, this would average out the cost price over a long term," says Rao.

He further adds that FDs fail to beat the inflation even now, so it does not make sense to explore them as a viable investing alternative.

“In the current rising interest rate scenario, FD looks attractive option for very conservative investors, but it still doesn’t beat the inflation. Any investment which doesn’t beat inflation doesn’t make investment sense as the money degrows in real terms," he adds.

We share details on tax saving fixed deposits. 
View Full Image
We share details on tax saving fixed deposits. 

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Published: 09 Oct 2022, 12:00 PM IST
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