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7 Avenues To Invest As Bank Deposit Rates Fall - Outside View by PersonalFN

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7 Avenues To Invest As Bank Deposit Rates Fall
Apr 12, 2017

This is an unusual phenomenon, especially considering we are a developing country.

Banks are flooded with deposits and the credit off-take has recently hit the lowest level in the last decade. As per the data from RBI, credit growth for the fortnight ended on March 03, 2017 stood at a mere 4.1% -- indicating that there's still a risk-averseness on the part of banks, and even corporations are shying away from borrowing big-ticket loans. Many of them are finding it difficult to service the existing debt. This further reduces the possibility of any revival in the credit growth. As a result, banks will be reluctant to raise fresh deposits until the borrowing activities pick up momentum.

Needless to say, in FY 2017-18, interest rates on deposits are likely to stay under pressure. Recent actions by various banks support this assumption. Many private sector banks such as HDFC Bank, Axis Bank, and also new entrants like Bandhan Bank have recently revised deposit rates downwards.

Commenting on the falling deposit rates, Mr Chandra Shekhar Ghosh, MD of Bandhan Bank said, "Credit growth is at a historical low. Banks have no alternative but to cut deposit rates as they have lesser opportunity to deploy the fund."

Echoing his view, Mr Shyam Srinivasan, MD of the Federal Bank said, "These are not decisions taken in isolation. It's often calibrated to growth in credit, competitive scenarios, the credit to deposit ratio of the concerned bank and of course credit quality."

Also, the Government reduced interest rates on Small Savings Schemes (SSS) such as Public Provident Fund (PPF)), Kisan Vikas Patra (KVP), and Sukanya Samriddhi Yojana by 10 bps (basis points) lately. One basis point is a hundredth of a percent.

Now the question is, where you should invest under present scenario?

PersonalFN believes you shouldn't speculate on the movement of any asset class and that includes the movement of interest rates on bonds and deposits. Your investment preferences should be guided by your financial goals and aligned with your risk appetite. Therefore, revisit your asset allocation plan if required and rebalance your portfolio if needed.

As a part of rebalancing your portfolio, if you need to make fresh investments, here are suggested avenues to consider:

  1. Balanced Funds (if you have a high risk appetite and a investment horizon of at least 3-5 years)
  2. Large cap funds (for high risk appetite; for risk averse investors with an investment horizon of 2-3 years)
  3. MIPs (for moderate risk takers with an investment horizon of 2-3 years)
  4. Dynamic bond funds (for moderate risk takers with an investment horizon of at least 3 years)
  5. Short-term funds (for moderate risk takers with an investment horizon of 2-3 years)
  6. Ultra-short term funds (for risk averse investors with an investment horizon of 3-6 months)
  7. Liquid funds (for risk averse investors with an investment horizon of less than 6 months)

Compared to bank FDs, the aforesaid investment avenues are also tax efficient. And never forget, you should always look at the inflation-adjusted returns, so as long as they are positive, you shouldn't bother about nominal interest rates.

If you need research-backed guidance to select the best mutual funds and make lucrative gains, try PersonalFN's 'FundSelect' today! Through this, it will bring to you: The 6 Ultimate Secrets to Beating the Market By A Whopping 70%! It's a time tested way to beat the market, and we highly recommend that you try this service that comes with a 30-days full money back guarantee. No hassle, no quibble.

If you need handholding as you walk on the path to wealth creation or rebalancing your investment portfolio, don't hesitate to seek superlative assistance of a Certified Financial Guardian (CFG), who is a mark of trust and respect.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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