Why Now Is A Good Time To Lock In Your Fixed Deposit

If the volatility of equity markets is something you are not comfortable with and protecting your principle is your priority, then fixed income can be the best bet.

Interest rates of fixed deposits change according to the monetary policy and investors can use the rate cycle to make the best of the investment.

Loan and deposit interest rates are used to implement broad liquidity objectives in the economy by the central bank. The interest rates usually align with the stance of the Reserve Bank of India's monetary policy.

The monetary policy has not changed from 'withdrawal of accommodation' in the last 18 months. This means that the interest rates on deposits has also remained high, attracting more of them.

Who Should Invest And When

There are rate cycles that are driven by the changes in the monetary policy. In order to get the advantage of highest interest rates, it is important for investors to be able to lock in their deposit before rate cuts.

"When the rate cycle reverses, deposit rates will become even more unattractive, unless there is a dramatic correction in the equities," said Mohit Gang, chief executing officer of Moneyfront.

Rate cycle reversal means a cut in the interest rate on deposits, which is anticipated in this financial year.

"The best time is now, as rate cuts will make deposits further unattractive in the aspect of returns," said Gang.

Tax Treatment And Returns

There is not much tax advantage or benefits for fixed deposits. FDs are taxed at slab rate, which means the individual will need to add it to their income and will be taxed accordingly.

"More money is moving toward equity and mutual funds and out of fixed deposit as there is a change in the mindset of the investors," said Gang.

More investors are now drawn to equity due to the attractive returns despite the risk that accompany the investment, he said.

Strategies For Senior Citizens

There is a 0.5% higher interest rate that is available for senior citizens that is offered in fixed deposits.

Fixed deposits are a good avenue for senior citizens looking to simply protect their principle but there are other strategies that will fetch slightly higher returns, according to Gang.

"Debt funds bring higher chances of capital appreciation or some portion of their fixed deposits can be moved to corporate deposits which will bring them higher returns," he said.

The yield on most corporate bonds hover over 10% which is significantly higher than the interest offered for a fixed deposit.

Callable Vs Non-Callable Fixed Deposits

There are two types of fixed deposits: callable and non-callable deposits.

A callable deposit can be withdrawn before the maturity period and does not have a lock-in period. Though the investor is allowed to withdraw their deposit, there will be a fee that is charged when the withdrawal is done before the maturity date.

The minimum limit for callable deposits in banks is Rs 5,000. Callable deposits have liquidity advantage despite the charge on withdrawal.

In the case of non-callable deposits, there is a strict lock-in period where the investor is not allowed to withdraw their money.

There, deposits often come with a slightly higher interest rate than callable deposits. The money cannot be withdrawn without cases of bankruptcy, court order, business liquidation or demise of depositor.

The minimum limit for non-callable deposit was raised to Rs 1 crore from Rs 15 lakh in October 2023. The maximum deposit is Rs 5 crore for Indian residents and Rs 2 crore for non-resident or external accounts.

Non-callable deposits do not have liquidity advantage as only emergencies vouch for withdrawal before maturity.