Soaring Interest Rates – How to maximise the benefits

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People from all walks in life are now experiencing the affect of soaring interest rates on their day to day livelihood. While some may be suffering to increased interest payouts, others may be enjoying with higher interest receipts. This post would be primarily be concentrating upon increasing the benefits by using the rising interest rates in one’s favour.

Instead of stifling your funds into a 3.5% rate saving interest paying account, one can consider parking short term funds into Liquid schemes of various mutual fund houses. The returns are not great, but I would not mind the 7-8.5% payout by such funds for my money which would be just earning 3.5% interest. And the cherry on the top is that I can withdraw money from these funds at no notice.

Corporate Deposits

Most of the investors generally prefer parking their funds in the form of fixed deposits with banks. However, Corporate deposits of reputed Companies can provide any where between 9% to 12% returns for a tenure of 1-5 years duration. The riskier the Company, the higher the interest rate provided to the investors.

Fixed Maturity Plans

At the time of rising interest rates, many fund houses come up with increased number of Fixed Maturity Plans or better known as FMPs. These are similar to fixed deposits offered by banks when it comes to returns, but offer a tax efficient treatment. Income from FMPs are chargeable under the head of Capital Gain instead of Income from Other sources (in case of Bank FDs).

Diversification & TDS

A less used diversification tactic may also help in preventing TDS deduction at interest rate payout. Banks deduct TDS on interest payouts over a certain limit. Diversifying the fixed deposits with different banks would help in reducing the TDS deductions as well as diversifying the risks. This is specially important when the risk is higher in case of FMPs.

Duration

When it comes to investing in Fixed Deposits, a general tendency amongst the investors is to invest in a tenure which offers the maximum interest rate. However, it is worth thinking that the high rate of interest won’t be prevalent for long term as high interest rate though it helps in curtailing inflation, acts as a dampener for economic growth. Hence even though the interest rate for a 10 year fixed deposit with a bank may be 1% less than a 2-3 year fixed deposit, it would provide higher yields in long term due to the power of compounding. Simply put a 10 year fixed deposit at 10% rate would give a yield of roughly 13.5-14% (annually compounded interest rate). On the contrary, a two year Fixed deposit at 12% rate would yield just 12.5%.  Further, booking a 10 year fixed deposit at current high rate ensures that would continue to enjoy high interest rate for next 10 years on the fixed deposit.

Fixed Deposit Denomination

If you have 2 lacs INR to create fixed deposits how would you go ahead with getting one? One option is to walk into a bank and get a single FD made for Rs. 2 lac. Another option is to create 10 fixed deposits each of Rs. 20,000.  What would be the advantage of such a breakup? Well it provides a flexibility in case you would have to prematurely redeem your fixed deposit. In the first case, even though your requirement was just to encash Rs. 50,000 of the FD, the entire FD would have to be broken down and be subject to penalty payment (generallyl 1-2%). While in the second method, just 2-3 fixed deposits may be redeemed without touching the remaining fixed deposits.

For any clarifications, please feel free to approach Banyan Financial Advisors

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