The Reserve Bank of India cut down the Repo Rate by 75 points basis. With the reduction in Repo Rate, banks and non-banking financial institutions have also reduced the rate of interest on several investment schemes, including an interest rate on fixed deposits. The rate of return on the fixed deposits is an all-time low, and it is expected that the rates may further fall in the coming time.
Should you invest in a fixed deposit?
Given the present economic scenario in the pandemic, the liquidity challenges are not felt by a single individual or entity. The entire country has come to a near standstill, despite the slow opening of economic activities. In these circumstances, however, experts believe you should lock your fixed deposit because of the following reasons:
- The liquidity crisis is not only faced by the common man, but banks and other financial institutions are also experiencing liquidity challenges. Thus, as a result, it is expected that the FD rates may further go down in the coming time. It would be better if the investors invest in an FD at this time. Joydeep Sen, the founder of wiseinvestor.in, believes that investors must lock their FD for at least 3 years even if the interest rates are low as it will get further reduced.
- Another reason why people experts believe that investors should continue investing in a fixed deposit as the fixed deposits are still safe and secure investment instruments. Adhil Shetty, CEO of BankBazaar.com says, “Considering the global situation and the looming recession, lower interest rates should not deter you from continuing your investments in bank fixed deposits to achieve your financial goals.” Despite the rate cuts, fixed deposits offer assured returns and capital safety in the present market conditions.
What are the things that investors must keep in mind in the current scenario:
- Invest in short term FD: As one cannot expect how far the pandemic will impact our economy. It would be better if you don’t invest in long term FD. Go for a fixed deposit for a period up to 1 year.
- Choose the financial institution wisely: Understandably, the rate of interest on a fixed deposit is low in the present scenario. Thus, investors may be tempted to go with the financial institutions which are offering a higher rate of interest. However, you should avoid doing that. Instead, you should check the credibility of the financial institutions before investing in a fixed deposit. It would be wise if you invest in a public sector bank FD or the fixed deposits offered by leading private banks. Don’t invest in fixed deposit schemes of co-operative banks or small financial institutions.
- Invest in smaller FDs: Instead of investing the entire amount in a single FD, go for multiple FDs. It may be because the amount in fixed deposit is insured up to Rs. 5 lakhs by Deposit Insurance and Credit Guarantee Corporation (DICGC). The insurance cover is provided in case the banks fail to deliver the fixed deposit amount to the investors.
- Renewing the fixed deposit: It is further advisable to renew your fixed deposit amount to get returns on your investments. FD can help you to get finance in case of emergency. Also, if you are facing liquidity challenges in the present time, you can take a loan against FD deposit. Banks provide loans on fixed deposits up to 90% of the amount of deposit, and the rates are 1%-2% is higher than the interest on fixed deposits.
Conclusion: Thus, investors can invest in a fixed deposit at this time as it is expected that the rates will further fall in the future. However, you must carefully select the institution and investment scheme before investing in FD.