Where to invest when FD returns are low

After over three years of trending downwards, interest rates have bottomed out. They will start rising again. In the recent Monetary Policy Review, the RBI maintained the repo rate. Despite this, some banks have increased deposit and loan rates. This also means marginally better returns on fixed deposits. However, broadly speaking, the interest rates remain low. People choose fixed deposit and debt instruments since they are liquid, are low-risk, and offer an assured rate of return. Keeping these parameters in mind, let's examine some other options for the short, medium, and long-term for higher returns.

SMALL BANK DEPOSITS
It’s likely that you may have an account with a major private or public sector bank. However, there are smaller, lesser-known banks that offer higher interest rates on your deposits. For example, today, a leading public sector bank may offer you 6 per cent returns on a fixed deposit of less than '1 crore for five years. But some smaller banks, may offer you up to 7.25 per cent on the same deposit. A quick scan of the fixed deposit market may help you get good deals.

FUNDS
These are low-risk mutual fund schemes offered by every fund house. They invest your money in debt instruments with short maturity periods. Your money remains safe from market volatility, earns a moderate rate of return (usually, a bit higher than fixed deposits), and can be redeemed in a day. Unlike most mutual funds, liquid funds don't have an exit load. You can invest in one online via a mutual fund aggregator or buy directly from the fund house’s website. 

CORPORATE DEPOSITS
These are fixed deposits offered by public and private sector companies. The interest rates on offer are typically higher than those offered by banks. For senior citizens, the interest rates are marginally higher. For example, a well-known financial institution is offering deposit rates of 7.60 per cent for one year, 7.80 per cent for two years, and 7.85 per cent for 3-5 years. Also pay attention to the credit rating of the company offering the deposit. The higher the rating (AAA, AA, A), the safer your deposit and higher the chances of getting your principal back with interest. The lower the rating (B, C, D), the higher the risks. You can buy these deposits via participant banks, trading platforms, or directly from the company.

MUTUAL FUNDS
These are mutual funds that invest in a mix of equity (stocks) and debt (bonds, deposits) to create a portfolio that is both earning high returns while cushioning you from market crashes. There are debt-oriented balanced funds (with 65 per cent or more invested in debt securities) and equity-oriented ones (with 65 per cent or more invested in the stock market). You can pick one as per your risk appetite. Use an SIP for best long-term results. As of today, you can avoid any mutual fund that has long-term debt instruments as these would be adversely impacted by any increase in interest rates.

7.75% BOND
Formerly, known as the 8% Government of India Bond, the 7.75% Bond offers a rate of return in tandem with prevalent interest rates. Its tenure has increased from six years to seven, with an exception for senior citizens. Investors aged between 60 and 70 get a tenure of six years; those between 70 and 80 get five years; those above 80 years get a tenure of four years. The bond can be bought in multiples of '1,000 from selected distributors such as trading platforms and nationalised banks.

PPF, SSS, SCSS
There is no beating some small savings schemes. The PPF returns 7.6 per cent; the Sukanya Samriddhi Scheme (for the girl child) returns 8.1 per cent, and the Senior Citizens Savings Scheme returns 8.3 per cent. These compare favourably with most other debt investment options available. For long-term investing for the risk-averse, these instruments are must-haves. Accounts can be opened via participant banks or post offices. However, you need to note that short-term liquidity is an issue with these instruments and they're suited for long-term savings.