Should You Lock In Your Money In FDs At High Interest Rates?

Between May 2022 and February 2023, the repo rate increased by 2.5 per cent to 6.5 per cent and has remained unchanged since, leading to multi-year high fixed deposit (FD) rates. Now, experts are unanimous that whenever the Reserve Bank of India (RBI) changes rates again, it is most likely to cut interest rates.

Naturally, banks are offering high interest on fixed deposits. Recently the State Bank of India (SBI) increased its FD interest rates for certain tenures by 0.25- 0.75 per cent for deposits below rupees two crore.  The interest rate for three years to less than five years remains at 6.75 per cent for the public and 7.25 per cent for senior citizens. 

"So if one's portfolio consists of fixed income yielding securities like Bank FDs, FDs from non-banking financial companies (NBFCs) or corporations, this is the time to lock in that extra return. One can make best use of this time," says Madhupam Krishna, SEBI Registered Investment Advisor (RIA) and Chief Planner, WealthWisher Financial Planner and Advisors. 
Worth The Risk? 

"Before investing in FDs, you should compare FD rates across various banks to make an educated decision," says Vijay Kuppa, CEO, InCred Money. 

Small Finance Banks (SFBs) typically offer 1-1.5 per cent more in interest compared to conventional banks, with rates up to nine per cent in the current high-interest scenario.

"Returns are good but should not compromise safety and requirements. Investors must check the credit rating or safety of the deposits," says Krishna. 

Most scheduled commercial banks stand best in terms of safety and the Deposit Insurance and Credit Guarantee Corporation (DICGC) provides Rs 5 lakh insurance for a depositor in a bank. 

"Just for an extra 0.5 per cent one must not shift deposits from a safe organisation. We have seen depositors shifting to small finance banks (SFBs) or NBFCs for better returns. I am not saying that NBFCs or SFBs are bad investments but one must be clear that every extra income is extra risk taken," says Krishna.  

How to Choose a Tenure 
"There is no set formula to choose the duration of FDs. An investor needs to consider the current interest rate scenario and the duration that provides the highest interest rate," says Kuppa.

For example, when the interest rates are at their highs, choose an FD which maximises the maturity and the interest rate. This will help you to reduce reinvestment risk (risk that interest rates go down in the future).

"During your retirement, opt for a non-cumulative FD which provides interest pay out at regular intervals (annually, semi-annually, quarterly, monthly)," says Kuppa. Additionally, if you have a financial commitment in the coming years, you can match the maturity of the FD with the expected date of the outflow.

Does It Make Sense For Senior Citizens? 
If you are a senior citizen and live on interest of fixed deposits only, the more duration you have in a high-yielding fixed deposit it is better. But you must also realise that there will be a risk of reinvestment when the fixed deposit matures. 

"Senior citizens must look at other periodic income schemes. You can have a mix of some government schemes like the Senior Citizen Savings Scheme, PM Vaya Vandana Scheme, pensions from various annuity companies and systematic withdrawal plans (SWPs) of mutual funds. SWP from mutual funds offers a lot of features like low tax, flexibility of amount to be withdrawn, and choosing the periodicity of withdrawal," says Krishna. 

Word Of Caution 
"The decision to lock your money in high-interest fixed deposits (FDs) depends on your financial goals. FDs provide capital protection: your principal amount is secure, and you are assured a fixed return over the deposit tenor, making it a low-risk investment," says Adhil Shetty, CEO, BankBazaar.com, a fintech portal. 

This stability can be particularly appealing for conservative investors or those nearing retirement or a set short-term financial milestone, for whom the safety of their capital is more important than high returns. 

"However, it a less attractive option for long-term wealth growth. In periods of high inflation, the real return on FDs ends up being negative, as the interest earned may not keep pace with the rising cost of living. This means that while your nominal capital is protected, its purchasing power diminishes over time. In other words, the real value of your investment decreases," says Adhil Shetty, CEO, BankBazaar.com, a fintech portal. 

Moreover, high-interest FDs tend to be long-term, usually 5 years or more. Investing the funds in another instrument like mutual funds may be a better choice for investors seeking to preserve and grow their wealth for the long term.