June 18, 2019
Bank FDs have been the traditional go-to investment option for millions of Indians. While you would have also been advised opening an FD as the first step of wealth creation, take a step back and analyze the real return you are gaining out of bank FDs. Bank interest rates are determined based on the REPO rate (determined by the central bank – Reserve Bank of India) and the MCLR (marginal cost of additional lending rate), a parameter unique for each bank.
Low returns on Bank FDs
The current rates have been between 6% to 7.75%. This is a phase of low-interest rates, low inflation, and high growth. While equity-linked instruments are earning decently well, you may feel left out with low returns if you are stuck to bank FDs. With inflation rates between 3-4%, the real rate of return is just 2-3% for you. This is a double whammy as you are missing out on the Indian growth story and getting hit by inflation.
Alternatives to Bank FDs
You can invariably go to market-linked instruments as a means of achieving high returns, but you will increase your risk levels of losing the capital or returns by that percentage. Instead, look at other stable investment options, which also pay a higher Return on Investment (ROI) irrespective of the inflation levels in the economy.
Company FDs are the unexplored gem in the fixed income portfolio. With a high-interest rate offering from 8% upwards along with safety and stability, choosing the right company, FD can do wonders to your idle money in the account.
Generating higher returns with Company FDs
Company FDs offer the following features which beat the returns from bank FDs while retaining the same attributes and offering additional benefits.
- Differential interest rates
With Bajaj Finance FD, you can be assured of higher interest rates not just from banks, but also according to your status. If you are a new customer, you can look at a rate of 8.6% for 5-year tenor. If you are a returning customer you can avail an additional 0.10%. As a senior citizen, you can gain an additional 0.35%, which is a substantial increase. Also, if you are a Bajaj employee, you get an additional 0.25%.
- Higher interest payout
If you use an online FD calculator to calculate monthly interest amount, you will see the difference between a 7% quarterly compounded interest and an 8.6% quarterly compounded interest. The following table with Bajaj Finance FD interest rates will give a clear picture of the returns.
|Investor Type||Interest rate||Principal Amount||Tenor||Return||ROI|
|New customer||8.6%||Rs. 25,000||5 years||Rs. 12,765||51%|
|Senior citizens||8.95%||Rs. 25,000||5 years||Rs. 13,377||54%|
|Existing customers||8.85%||Rs. 25,000||5 years||Rs. 13,202||53%|
- Laddering with higher interest rates
While bank FDs lack in returns, returns from Company FDs can be multiplied by creating a series of fixed deposits which will mature at specific intervals. The tenors can be chosen by you keeping in mind the various financial obligations. This helps in further enhancing the returns to build a substantial corpus.
- Choosing cumulative features with high ROI (Return on Investment)
The cumulative feature of the Bajaj Finance FD allows you to accumulate the interest earned each quarter and have a sizeable corpus towards maturity. It is not recommended to go for a periodic payout with the non-cumulative FD where the interest earned is less than the cumulative option.
Bank FDs are traditionally regarded as safe but with company FDs like Bajaj Finance FD which have been accredited with high safety ratings from ICRA (MAAA/stable) and CRISIL (FAAA/Stable), you have the guarantee and assurance of return of principal amount and interest. With a minimum amount of Rs. 25,000, you can look at generating much higher returns as compared to your current bank FDs. Choose your investment options carefully along with the tenor.