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Business News/ Money / Personal Finance/  The downsides of floating-rate fixed deposits (FDs). Better invest in this for now
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The downsides of floating-rate fixed deposits (FDs). Better invest in this for now

Interest rates on floating rate fixed deposits (FDs) are variable and revised based on a benchmark reference rate. Experts recommend locking money into high-return FDs now before rates decrease

The interest pay-out for a floating rate FD takes place on the last day of every quarter. (Pixabay)Premium
The interest pay-out for a floating rate FD takes place on the last day of every quarter. (Pixabay)

The interest rates on floating rate fixed deposits (FDs) are linked to a benchmark instrument's reference rate. Thus, they are variable during the tenure and are revised following the underlying reference rate.

Fixed-rate FD vs floating-rate FD

Investment returns for floating rate FDs are based on a reference rate, such as the repo rate of the Reserve Bank of India (RBI) or a Treasury Bill yield. In contrast to a regular Fixed Deposit (FD), where the interest rate is fixed for the duration of the deposit.

The Reserve Bank of India (RBI), in its monetary policy meeting held on December 8, 2023, kept the repo rate unchanged at 6.5 per cent. This was the fifth time in a row that the central bank has decided to keep the key benchmark policy rate unchanged.

Since there is no change in the repo rate so should one invest in a floating-rate fixed deposit? Well, personal finance experts say that this is the best time to lock your money into high-return term deposits.

“We expect that the key policy rates will come down post-Q2 2024. Gradually, the market will start factoring this, which will have a downward impact on the FD returns of various banks, small finance banks, and NBFCs. Given the context, this is the best time to lock your money into high-return FDs. Small finance banks are a good choice as they offer about 1-2% per annum extra interest compared to most established banks," said Anshul Gupta, Co-Founder and Chief Investment Officer, of Wint Wealth.

“Customers can lock in their money in FDs of shorter tenures offering higher returns," said Adhil Shetty, CEO, of BankBazaar.com.

Should you invest in floating-rate fixed deposits? 

Some banks are trying to sell floating-rate FDs. Investors would do well not to invest in these FDs, as the interest rates are expected to decrease soon, said Anshul Gupta.

Benefits of floating rate FDs

-The investor will enjoy higher returns if the base rate of floating rate FDs has an increasing trend.

-The interest pay-out for a floating rate FD takes place on the last day of every quarter. 

-Nomination facility available

-Senior citizens enjoy the special benefit of a higher interest rate of 50 basis points more than general customers.

-You can avail of loans against your floating rate fixed deposit.

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

 

 

 

 

 

 

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ABOUT THE AUTHOR
Sangeeta Ojha
A business media enthusiast. Writes on personal finance, business and banking.
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Published: 18 Dec 2023, 09:30 AM IST
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