In recent times, investors have plenty of investment options available. However, investors who intend to avoid risks still opt for fixed deposits (FDs) as the preferred investment option as it is one of the oldest and safest investments. With floating rate fixed deposits, investors can get higher returns than traditional FDs by taking the exposure of an increasing trend in interest rates.
Floating interest rates are based on an underlying rate that is decided and governed by the Central Bank. In the current scenario, the Reserve Bank of India (RBI) has repeatedly hiked the repo rates.
But does that make investing in floating-rate FDs worthwhile? Here are the details you need to know to make an informed decision.
Fixed Rate FDs
Fixed-rate FDs are standard term deposits in which the interest on the principal amount remains fixed throughout the tenure. Once the tenure of the deposit comes to an end, investors can withdraw their funds. However, one can also go for a premature withdrawal. In that case, a certain amount of penalty is charged.
There are several types of fixed-rate FDs available which are:
- Regular FDs
- FDs for senior citizens
- Corporate FD account
- Tax saving FD account
- NRO/NRE FD account
- FD with monthly pay/ FD with maturity pay-out
Floating Rate FDs
Floating rate fixed deposits or term deposits are a form of FDs where the interest rate fluctuates throughout the tenure. These are linked with the repo rate set by the Reserve Bank of India (RBI) or the Treasury Bill (T-Bill) yield set during the biweekly auction on RBI’s website. The interest rates are periodically reset to reflect the respective benchmark.
Let’s get into an example for better clarity – You have invested in a floating FD with a markup of 0.6% above the repo rate. Now suppose the current repo rate is 6.5% which means your investment will earn a return of 7.1% per annum. Now if RBI hikes the repo rate to 6.7% then your floating FD will be generating a return of 7.3% per annum.
It is advisable to invest in floating-rate fixed deposits when the market interest rates have a high potential of getting hiked. However, if the trend of the underlying rate declines, then the returns might be lower than fixed FD rates.
Benefits of Floating rates FDs
The following are the benefits of floating rate FDs:
- If the underlying rate or the base rate of floating rate FDs has an increasing trend, the investor will enjoy higher returns.
- The interest pay-out for a floating rate FD takes place on the last day of every quarter. Therefore, investors can generate a regular return on the investment.
- There is also a nomination facility available
- Senior citizens are entitled to a special benefit; they can enjoy a special benefit of a higher interest rate which could be50 basis points higher than the regular interest rate of the prevailing floating fixed deposits.
- One can also avail the benefit of premature withdrawal without having to pay any penalty charges.
Should You Invest in Floating Rate FDs If Interest Rates Are Rising?
In the current scenario of rising interest rates, it may be beneficial to invest in floating-rate FDs temporarily. However, the future of this trend is not clear.
If you are planning to invest in a floating rate FD and if the interest rate turns into a declining trend, you may end up making a loss on investment. In that case, you may end up making even fewer returns than normal fixed-rate FDs.
Floating rate FDs can be a lucrative investment option when the interest rates are on a rising trend. Investors can get incentivised if they remain locked in for a longer period.
Floating rate FDs are good investment options for investors who are looking for a little higher returns by sticking with the same risk exposure as a bank. This type of investment best suits investors who stay updated about changes in market rates and may not want to diversify their investment portfolio into avenues other than FDs. It is recommended to invest only if you are comfortable with assessing market trends.
Frequently Asked Questions
Are there any eligibility criteria to invest in floating-rate FDs?
A resident individual and HUFs are eligible to invest in floating rate FDs. There are no minimum and maximum age limits or other criteria for investing.
Can I use floating-rate FDs as collateral against a loan?
No, these floating rate FDs cannot be used as collateral against any sort of loan in any bank or other financial institution.
What is the minimum investment requirement for floating rate FDs?
There is no hard and fast rule for minimum investment requirements for floating interest rate FDs in all financial institutions. However, some banks have a minimum requirement of ₹10,000.