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Business News/ Money / Personal Finance/  Should senior citizens invest in small finance bank FDs giving 9% to 9.50% returns: Explained
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Should senior citizens invest in small finance bank FDs giving 9% to 9.50% returns: Explained

But so far, two small finance banks are providing the highest FD rate in the nation. For deposits with a 700-day tenor, Utkarsh Small Finance Bank (SFB) is now giving a maximum interest rate of 8.25% for the general public and 9.00% for elderly individuals.

In the midst of the rising interest rate regime, Punjab & Sind Bank tops the list of public banks, offering senior citizens an interest rate of 8.50% per year and the general public an interest rate of 8%. (iStock)Premium
In the midst of the rising interest rate regime, Punjab & Sind Bank tops the list of public banks, offering senior citizens an interest rate of 8.50% per year and the general public an interest rate of 8%. (iStock)

At the direction of RBI Governor Shaktikanta Das, the Monetary Policy Committee (MPC) raised the repo rate by 25 basis points to 6.5 per cent in February. The repo rate has gone up six times since May 2022, for a total increase of 250 basis points. Nearly all the banks have announced hikes in interest rates on fixed deposits (FDs) in response to the repo rate hike. The RBI had to increase its benchmark rate by 250 basis points to 6.50 percent over six consecutive rises starting in May 2022 since inflation had exceeded the central bank's tolerance level of 6 percent for ten months in 2022.

Latest FD interest rates of banks

In the midst of the rising interest rate regime, Punjab & Sind Bank tops the list of public banks, offering senior citizens an interest rate of 8.50% per year and the general public an interest rate of 8%. Central Bank of India is next, with a maximum interest rate of 7.35% for non-senior citizens and 7.85% for senior citizens. The maximum interest rates on domestic term deposits offered by government banks currently vary from 7% to 8% for the general public and from 7.50% to 8.50% for elderly persons. Whereas Bandhan Bank and Tamilnad Mercantile Bank are now giving the highest interest rates among private sector banks, with 8% for the general public and 8.50% for elderly individuals, respectively, as per the data compiled by BankBazaar.

But so far, two small finance banks are providing the highest FD rate in the nation. For deposits with a 700-day tenor, Utkarsh Small Finance Bank (SFB) is now giving a maximum interest rate of 8.25% for the general public and 9.00% for elderly individuals. Particularly in comparison, Unity Small Finance Bank offers a maximum interest rate of 9.00% for the general public and 9.50% for senior citizens on a tenor of 1001 Days. In addition, the bank offers regular rates of 8.75% and 9.25% for senior citizens on two specific tenors of 181-201 days and 501 days, respectively.

Should investors invest in small finance bank FDs?

Yash Joshi, Co-Founder and Director UpperCrust Wealth said “Senior citizens who are considering investing in Small Finance Bank FDs that offer 9% returns should be aware of the risks involved before making any investment decision. The primary risk involved in investing in Small Finance Bank FDs is credit risk. Small Finance Banks operate with a smaller deposit base and may have a higher risk of default as compared to larger banks. Therefore, it's important to check the credit rating of the bank before investing in their FDs. Senior citizens should only invest in Small Finance Bank FDs that have a good credit rating."

“Another risk involved in investing in Small Finance Bank FDs is the liquidity risk. These banks may have a limited branch network and may not be easily accessible to senior citizens in case they need to withdraw their funds. Therefore, senior citizens should consider their liquidity needs before investing in Small Finance Bank FDs. An alternative investment option for senior citizens looking for better returns would be Debt Mutual Funds. These funds invest in fixed-income securities like bonds, debentures, and government securities. Debt Mutual Funds offer higher returns as compared to Bank FDs, and the returns are tax-efficient for investors who are in a lower tax bracket. However, it's important to note that Debt Mutual Funds carry higher risks than Bank FDs and require a higher level of understanding," said Yash Joshi.

“In conclusion, senior citizens who are considering investing in Small Finance Bank FDs that offer 9% returns should be aware of the risks involved. They should consider the credit rating and liquidity needs before making any investment decision. An alternative investment option for senior citizens would be Debt Mutual Funds, but it requires a higher level of understanding and carries higher risks. It's advisable to consult with a financial advisor before making any investment decision," Yash Joshi further added.

Ravinder Voomidisingh, CFA, COO, IndiaP2P said “Deposits up to INR 5 lakhs are guaranteed, hence FDs up to this amount may be considered safe in an SFB. For larger deposits, we must understand that while SFBs are banks, there are distinct from full-fledged banks. As per RBI, 75% of the credit given out by SFBs is required to go towards priority sector lending and 50% of the loan portfolio should constitute loans under INR 25 lakhs. Whereas, full-fledged banks have a 40% priority sector lending requirement. Therefore, given lesser diversification, the portfolios of SFBs are more volatile. Full-fledged banks are also more likely to be bailed by the RBI in case of a crisis to prevent systemic risks. While investing up to INR 5 lakhs is a worthwhile option, those with larger savings can explore high returns and higher risk options such as bonds, P2P lending etc. which can also offer predictable and often monthly returns."

Abhinav Angirish, Founder, Investonline.in said “Bank fixed deposits and Small Saving Plans offer pitiful and in some cases negative, real rates (also known as inflation-adjusted yields). If you believe that longer tenures may provide a larger return then as a senior citizen, you will be dissatisfied. Moreover, interest that exceeds 50,000 annually is subject to taxation under “Income From Other Sources" depending on your tax bracket."

“Only those who wish to remain outside of the purview of the Indian capital markets should consider investing in fixed deposits. For investors, especially those in the 30% tax bracket, a fixed deposit is the least tax-efficient option. If you solely rely on fixed income investments as a retiree, you might not be able to comfortably fund your retirement. The increased expense of living would be felt by you, especially in Tier I or metro areas. Seniors should invest 25–30% of their investment portfolio in equities through diversified equity–oriented mutual funds to offset the growing expense of living," said Abhinav Angirish.

“Consider wisely diversifying your holdings by choosing from the top large-cap funds, multi-cap funds, and aggressive hybrid funds. Instead of choosing schemes based solely on previous results, which may not be predictive of future returns, consider a wide range of quantitative and qualitative factors. Know the mutual fund house’s investment philosophies, procedures, and systems as well. This would provide you the ability to take a calculated risk, make a wise decision, and maybe maximise returns," Abhinav Angirish further added.

Commenting on fixed deposits interest rates of over 9% offered by small finance banks, Satyen Kothari, Founder and CEO of Cube said “Senior citizens, should avoid investing large values in small finance banks. This is because while the chances of losing money are quite low, there is still a possibility of their money can get stuck. The due diligence and diversification are not at par with other products and the risk is not commensurate to the returns. Broadly such products should account for only 5-10% of your portfolio. A majority of your portfolio should be in equity. India is going to become the 4th largest GDP by 2024 making the next 5-6 years the right time for equity."

Harsh Gahlaut, CEO, FinEdge said “When it comes to fixed income investing, we follow a simple belief – “return of capital" is more important than “return on capital"! While a lot of small finance banks such as Unity, Suryoday, Utkarsh, Equitas and Fincare are offering anything from 100-150 bps higher interest rates than FDs of comparable tenors from the top PSU and Private Banks, we suggest you give them a hard pass. Sure, a default is a very low probability event and there’s a 5 lakh DICGC guarantee in place, but it’s an incremental risk that’s just not worth taking for such a small additional payoff, especially for a senior citizen."

“In fact, a debt fund that invests into GILT’s and SDL’s with a 4-5 year roll down strategy will most likely provide you better tax adjusted returns at this point compared to a small finance bank FD, although their NAV’s can fluctuate during the time to maturity of the underlying. As a thumb rule, please educate yourself thoroughly and consult a competent advisor before investing into any mutual funds, as debt funds are completely different from fixed deposits," Harsh Gahlaut further added.

Nirav Karkera, Head of Research, Fisdom said “As goes with every other investment instrument, incremental returns often compensate for incremental risk. Within the fixed income category, such risk could emanate in the form of credit, duration or liquidity risk. From an overall risk standpoint, most small finance banks tend to be relatively riskier versus larger scheduled commercial banks. Investors must be cognizant of these dynamics and invest in line with their investment objective and risk profile. There are a variety of alternatives like dynamically managed, duration-based and strategy-based fixed income mutual funds that could augur well for investors."

Sagar Lele, WealthBasket Curator and Founder of Rupeeting said “Small finance banks offer higher rates compared to large commercial banks to attract deposits. As small finance banks scale up over the next few years, their cost of funds will come down, and so will their deposit rates. The current disparity does give out an opportunity to lock in higher rates. However, one needs to limit this opportunity."

“Smaller banks are subject to higher risk in case of economic downturns, and are also exposed to relatively higher risk on governance, management standards, risk management and operations, compared to larger peers. That said, deposits made with small finance banks are also covered under DICGC, which is an arm of RBI that insures all bank deposits up to Rs. 5 lakh. One can hence invest up to Rs. 5 lakh and consider the principal amount and interest to be free of risk. A good strategy could be to spread the FD exposure across multiple small finance banks, while also putting an overall limit on the exposure to them," Sagar Lele further added.

Ashok Chhajer As the CMD of Arihant Superstructures said “Higher the rate the risks are higher. However, it does not mean that they would fail in the commitments. It’s better to take professional advice on which specific small payments banks are safe to invest and one can allocate a small portion to such banks. Small banks like AU bank and many are doing good."

Vishal Vij, Founder and Managing Partner at Nestegg said “Although the fixed deposit rates offered by small finance banks are appealing, they come with a higher risk of default. Therefore, senior citizens investing their retirement savings should limit their investment to 5 lakhs per small finance bank, as this amount is insured under the DICGC Act of 1961. The DICGC guarantees a maximum of 5 lakhs, including both principal and interest, for each depositor."

Gautam Kalia, SVP and Head Super Investor at Sharekhan by BNP Paribas said “Higher YTMs or interest rates come with low credit quality (higher risk). Generally speaking, as safety of principal is paramount for Senior citizens, they should go for high quality debt. Mutual funds do not offer special intetest rate benefits to senior citizens but investors may allocate some funds to corporate bond funds."

 

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ABOUT THE AUTHOR
Vipul Das
Vipul Das is a Digital Business Content Producer at Livemint. He previously worked for Goodreturns.in (OneIndia News) and has over 5 years of expertise in the finance and business sector. Stocks, mutual funds, personal finance, tax, and banking are among his specialties, and he is a professional in industry research and business reporting. He received his bachelor's degree from Dr. CV Raman University and also have completed Diploma in Journalism and Mass Communication (DJMC).
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Published: 05 Mar 2023, 08:46 PM IST
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