What Are The Pros And Cons Of FD Interest Rates Rising?

From May to December 2022, the RBI raised the repo rate from 4.40 percentage to 6.25 percentage. In turn, financial institutions have responded by bumping up their FD interest rates. Over the last couple of years, rates on fixed deposits have not been as attractive as they are right now.

NBFCs, for instance, now offer rates as high as 7.95%. However, how do higher FD rates affect your overall financial health? What are the factors you need to consider when investing in FDs? Here’s what you need to know about the good and bad of higher FD interest rates.

Calculating fixed deposit interest for higher FD rates

On one level, higher FD interest rates translate to higher returns. Calculating fixed deposit interest is now a matter of entering a few numbers into an online tool.

Here is a glimpse of what details an FD calculator can offer you.

In comparison, if you locked into an FD a few months back and earned interest at a rate of 6.77%, INR 50,000 would yield INR 55,597 after 5 years. Therefore, the FD interest rate hike definitely makes fixed deposits more attractive than they were a while back.

Weighing FD returns versus inflation and tax

As a standalone product, a good way to measure the value of a fixed deposit is to understand your returns adjusted against tax and inflation. For one, inflation erodes the value of your returns. What’s more, the RBI normally raises the repo rate when inflation in the economy is high. So, higher FD interest rates could, to some extent, be nullified by higher levels of inflation.

Luckily, retail inflation in India has cooled down to below 6% in November. Moreover, NBFCs like Bajaj Finance, Mahindra Finance and PNB Housing Finance offer AAA-rated FDs with interest rates as high as 7.95%. This gives you a chance to keep your post-tax returns in the green.

So, while higher FD interest rates are a good thing for FD returns, the true value of your returns is only visible once you adjust for inflation and shave off a percentage as tax.

Using laddering to benefit from future FD rates

You may be in a situation wherein you want to lock into the currently attractive FD interest rates, but the idea of waiting a while is also attractive. What if FD interest rates rise in the future and combat inflation even better? However, is it justified that your funds remain idle in a bank until you find the right moment to invest?

A good way out is to ladder your FDs. This means investing your money in tranches to divide your corpus over multiple deposits with maturity terms a year apart. This way, you can reinvest the one that matures first at more current rates.

Creating an ideal portfolio to meet your goals

It's important to have an asset allocation strategy that aligns with your ability to take on risk. If you are young and have many working years on your side, you may want to channel most of your finances to equities. On the other hand, if you cannot tolerate any risk, a fixed deposit is an instrument to consider.

Another way to look at it is to consider how far in the future your goals are. For instance, if you have a goal coming up in the near future, between 2 and 3 years, you may want to move some of your funds away from equities to fixed-income instruments. This safeguards your finances against volatility in the market that could lead to loss of capital.

Wherever you fall on the spectrum of investors, know that fixed deposits are always worth considering. How they fit into your portfolio would boil down to your risk profile and the timeline over which you need to meet your goals.

Understanding how higher FD rates impact your financial makeup

Your financial endeavours do not exist in a vacuum, but are linked to one another. For instance, while a rise in the RBI’s repo rate is good for FD interest rates, you cannot say the same for loans.

Since borrowing becomes costlier for financial institutions, loans also bear a heftier interest rate. In fact, EMIs on floating interest-rate loans increase when the repo rate inches higher.

You now have a much more nuanced understanding of the pros and cons of FD interest rates rising. All said and done, higher rates are a positive sign for individuals looking to park their funds in safe and familiar deposits. When doing so, remember to consider the rates on offer at leading NBFCs to better combat inflation and give your portfolio the extra edge!

"Exciting news! Mid-day is now on WhatsApp Channels Subscribe today by clicking the link and stay updated with the latest news!" Click here!