Earlier in November, the State Bank of India slashed the interest rate offered on its deposits with tenures ranging from one to two years. The rate currently stands at 6.25 per cent. As such, the Reserve Bank of India has been slashing the policy lending rate in 2019, bringing it down from 6.50 per cent to 5.15 per cent. This has only marginally impacted deposit rates. The SBI's 1-2 year deposit rate, for example, was 6.80 per cent around the start of February. But for those who prefer fixed income instruments for generating returns, low interest rates are a dampener. So what are some of the alternatives available to them?
CHECK OTHER BANKS
Scan the market for interest rates offered by other ba-nks. If you are a high value dep-ositor, it will make sense for you to shift your deposit to a bank offering a higher rate. If you are with a government bank, you may find marginally higher returns with smaller government banks, or private banks of various sizes. Several private banks currently offer interest rates of seven per cent or higher on select tenures. Not just that, small-sized private banks offer higher rates, but you must take cognizance of risks associated with small banks.
The Public Provident Fund is the best debt investment option. It is government-backed, provides capital safety, tax deductions under Section 80C, and your returns are completely tax-free. However, it has a full maturity period of 15 years, and you can only make partial withdrawals after six years. Currently, it offers an interest rate of 7.9 per cent per annum compounded annually and subject to quarterly revisions. If immediate liquidity isn't a concern for you, PPF is an excellent debt investment for amounts up to `1.5 lakh a year. You can open a PPF account with a post office or an authorised bank.
SUKANYA SAMRIDDHI YOJANA
A must for families with girl children, the SSY currently offers returns of 8.4 per cent per annum compounded annually. The government-backed scheme provides assured returns, capital safety, tax deductions under Section 80C, and tax-free returns on investments up to `1.5 lakh a year. A family can start one account per girl child before she attains the age of 10. The account matures when she turns 21; however, deposits to the account can only be made up to 14 years from the date of account opening, after which it only accrues interest. Like PPF, the SSY is a great long-term investment and hence not ideal for managing liquidity needs. You can open an account via a post office or an authorized bank.
NATIONAL SAVINGS CERTIFICATE
A great way to earn assured returns for five-year blocks, the NSC currently provides a rate of return of 7.9 per cent per annum compounded annually. The investment provides assured returns, capital safety, tax deductions under Section 80C, and the interest earned in the first four years is reinvested and thus qualifies for fresh deductions under 80C. The NSC is a good alternative to the five-year FD because it offers comparatively higher returns than many banks. You can avail NSCs from your local post office.
SENIOR CITIZENS SAVINGS SCHEME
This is an essential investment scheme for senior citizens and other eligible individuals below the age of 60. The government-backed scheme currently returns an excellent 8.6 per cent per annum compounded quarterly over a five-year deposit which can be extended by one more block of three years. A maximum of `15 lakh per eligible investor person can be deposited via this scheme. Premature withdrawals are allowed after the first year with interest deductions. You can avail the scheme at a post office or eligible banks.
POST OFFICE TIME DEPOSITS
These are fixed deposits that you can open at a post office for one, two, three, or five years. The five-year deposit offers an interest rate of 7.7 per cent while the other three tenures offer 6.9 per cent, compounded quarterly. These rates are marginally higher than those offered by large government banks and many private banks.
These are deposits you make with companies, NBFCs, housing finance companies, etc. The pull is that these options normally provide a higher rate of return than bank deposits. While going for a corporate deposit, select one with a high credit rating (AAA or similar). A high rating indicates greater safety of capital. Since there have been a spate of high-profile corporate defaults, picking the right company for your deposit is critical, so don’t be swayed simply by the rate of return alone. Also, your returns are fully taxable as per your income tax slab. You can avail these deposits via online channels, net banking, via offline agents, or online trading platforms.
7.75% SAVINGS BONDS
This is a long-term debt investment option. Backed by the government, this is a safe investment option currently providing 7.75 per cent returns per annum compounded semi-annually. Its duration is long. But the carrot dangled before the investor is the rate of return. At a time when interest rates are trending downwards, getting assured returns of 7.75 per cent isn’t a bad deal. You can avail these bonds via banks or online trading platforms.
LIQUID MUTUAL FUNDS
Debt mutual funds containing securities with very short maturity durations can provide capital safety, moderate returns, and easy liquidity. If held for three years or longer, the investment becomes long-term and thus qualifies for indexation of returns, which make it tax-efficient.
Fixed deposits are ideal for low returns and liquidity management. But for long-term investment needs, look at small savings schemes, mutual funds, and the other options mentioned here, as these will provide you better returns.
— The writer is CEO, BankBazaar.com...