Should You Break Your Old FD for Higher Interest?

Should You Break Your Old Fixed Deposit for Higher Interest Rates?

Inflation is rising in India day by day and to control this inflation, government is rising the interest rates. So how rising interest rates help to control the inflation?

Well, its simple. Rising interest rates means the loans/debt will be costly. Thus, the cost of borrowing money will be more and that’s why investors/individuals/businesses will take less loan and thus less liquidity in the circulation and thus less inflation.

I personally advise investors to invest in debt mutual funds rather than Bank FDs. This is because in case of rising interest rates, your interest rates of Debt funds will be automatically adjusted to the new level but in case of your Bank FD, it will be same for the entire tenure of the Fixed Deposit.

Say for Example, if your Bank FD rate is 7% per annum for 3 years and after 1 year suppose if the bank rises the interest rates to 7.5% than you will still earn 7% per annum for the entire tenure of your fixed deposit.

However, what you can do is, you can break this FD and re-do FD with new interest rates. But well, here keep in mind that premature withdrawal of your FD will attract the penalty charges of around 0.5%. So if thee interest rates have gone 0.5% higher and the premature withdrawal charges are 0.5% than there is no sense of breaking this FD.

Another thing is that, there will be 2% penalty charge on breaking the FD on interest earnings. Means suppose if your interest rate is 7.5% and after 4 months suppose if you break the FD than you will get only 5.5% interest rate. This is 2% penalty. So just keep in mind these facts before breaking the Fixed Deposit.

Inflation will drive Fixed Deposit Returns in the Coming Future

 

Inflation will drive Fixed Deposit returns in the Coming Future

Right now the average annual inflation in India is 10-12% per annum while the Bank Fixed Deposits are earning just 7-8% annually and PPF and GOI Bonds are earning just 8.5% returns per annum.

So theoretically speaking, Bank FDs, PPF & GOI Bonds are safe investments but in reality they are not particularly right now. Because the inflation is higher than the returns offered by these fixed income instruments.

So actually right now you are losing money on your fixed income instruments. In fact, you are earning –2.5-4% (Negative) returns on your PPF & GOI Bonds right now.

It means that your wealth in these fixed income instruments is right now shrinking even though you think that it is growing at the safe rate. Your wealth is shrinking in the terms of the purchasing power.

And that’s why I personally feel that very soon, the banks and government will raise the interest rates on these fixed income instruments (And if not than they should..!!!).

Ideally the returns from Fixed income instruments should be 2% higher than the rate of inflation. So ideally right now in India the returns from Bank FDs should be 12-14% (As the inflation is 10-12% per annum) per annum.

Government should seriously raise its key interest rates. Otherwise, people who are living on fixed income instruments or planning to live on fixed income instruments after their retirements will suffer. Their retirement won’t be peaceful financially.

Mutual Funds and Fixed Deposits: Which is Better?

Mutual Funds and Fixed Deposits: Which is Better?

Mutual Funds (Debt) and Fixed deposits are the two financial products in which you can invest for the regular and safe income of your money.

Now, the question is that, Which is Better? Mutual Funds or Fixed deposits?

Well, in my opinion debt funds are better than the fixed deposits. This is because a debt mutual fund can invest your money in variety of corporate and debt papers – Government & private both while the FDs are only with one bank.

Thus, Debt mutual funds are more diversified than the bank FDs. Not only this but the debt funds can offer you more returns than the Bank FDs and that’s why to generate long term fix and steady income, debt funds are more advantageous than the bank Fixed deposits.

One thing I like about the debt funds the most is that, they can invest in private debt papers also that the individual investor can not. This is because Individuals have very less money to buy a commercial debt paper while the mutual funds are sitting on a huge cashpile of the money from the large amount of investors.

Another bad thing about FDs is that, they will charge TDS (Tax deduction at source) from you for the amount above Rs.10,000 while in case of mutual funds, there is not any such kind of TDS.

Thus, over all mutual funds are more convenient to build a portfolio rather than the FDs. And on the top of this, you can exit from the debt funds anytime. They don’t come with any lock-in period while the bank fixed deposits come with a lock-in period and you can not exit from them without any penalty charge before its lock-in period.

So choose debt mutual funds for your debt portfolio rather than Bank FDs.

Citibank in Auto Sweep FD Facility

Citibank in Auto Sweep FD Facility

Auto Sweep Fixed deposit facility is really a great scheme by which you can earn higher returns than your regular bank savings account. So What is Auto Sweep FD Facility and How it works?

Well, Auto Sweep FD facility means the predetermined surplus amount of your bank savings account will be automatically converted into a Fixed Deposit (FD) and earn higher than just 4% annual interest rates.

And when you withdraw your money, that FD will be automatically broken. In this way, your surplus money in your bank savings account will automatically earn higher interest rates than the regular savings account.

How does the auto sweep facility work?

1. You decide the maximum amount that you want in your account. This is also called the threshold limit.
2. You decide the amount for which the FDs need to be created.
3. You decide the tenure of these FDs

Interest Rate

The interest rate offered on these auto sweep FDs is the same as the rate offered on regular FDs of that duration.

This means that instead of the paltry interest on the savings account, you can earn returns in the range of 8% - 9%.

Is is Smooth?

Well,yes. It is 100% Smooth facility.

If the amount that you want to withdraw (through an ATM, cheque, etc.) is more than the amount in your account, one of the FDs would be broken immediately (this happens automatically), and you would get the money. (This is called Sweep-out or reverse-sweep).

Which banks other than Citibank offers this kind of Facility?

• ICICI Bank
• State Bank of India (SBI)
• State Bank of Mysore
• State Bank of Patiala
• State Bank of Bikaner and Jaipur (SBBJ)
• HDFC Bank
• Axis Bank (UTI Bank)
• Corporation Bank
• IDBI Bank
• Kotak Mahindra Bank
• Development Credit Bank (DCB)
• Oriental Bank of Commerce (OBC)
• Indian Bank
• Global Trust Bank (GTB)
• Andhra Bank
• Jammu and Kashmir Bank
• Citibank
• Indusind Bank

Fixed Deposits Versus Infrastructure Bonds – Pros & Cons

 

Fixed Deposits Versus Infrastructure Bonds – Pros & Cons

There are some pros and cons of investing in Bank Fixed Deposits and Tax Saving infrastructure bonds. First of all let us discuss about the infrastructure bonds.

IFCI, IDFC and L&T have already launched their infrastructure bonds. The infrastructure bonds are tax deductible up to maximum Rs.20,000 under section 80CCF.

The interest offered by these bonds is 7.5-8 percent, varying marginally on account of buy-back and listing options. The interest rates offered by these bonds are linked to the 10-year government of India bond, and cannot exceed that. Presently, the 10-year government bond is close to eight percent .The bonds have a lock-in period. The interest is not subject to tax deducted at source (TDS). Investments up to Rs 20,000 helps in saving tax.

Bank Fixed deposits are for short time horizon while the infrastructure bonds are for the longer time horizon. Bank FDs are insured up to Rs.1 lakh by Deposit Insurance and Credit Guarantee Corporation of India's guarantee.

However, there will be TDS on Bank FDs and they are not tax deductible. On the other hand, most of the infrastructure bonds offer 2% higher returns than the Bank FDs.

So What should be the Investor’s Strategy?

In my opinion, investors should diversify their money between several Bank Fixed deposits and infrastructure bonds. The reason why I advise to diversify your bank FDs is to avoid TDS. Ideally you should build a well-rounded portfolio of Bank FDs and Infrastructure bonds.

Bank of India Fixed Deposit Rates Raised by 75 Basis

Bank of India Fixed Deposit Rates Increased by 75 Basis Points

Bank of India has raised its FD rates by 0.75 %. Here are the new BOI FD Rates.

Bank of India has raised fixed deposit rates for various maturities by up to 75 basis points with effect from Monday.
The rate hike comes ahead of the Reserve Bank's second quarter policy review tomorrow.
For fixed deposit of 91-179 days, the new rate would be higher by 75 basis points at 6.25 per cent for all deposits less than Rs one crore, BoI said in a filing to the Bombay Stock Exchange.
For deposits maturing between 180-269 days, the deposit rates has been hiked by 50 basis points to 6.50 percent.
For deposits maturing between 270-364 days, it has been hiked by 75 basis points to 6.75 per cent and for all deposits for 1 year to less than two years, it has been raised by 50 basis points to 7.5 per cent.

How MIPs are Different from FDs?

How MIPs are different from FDs?

MIPs means monthly income plans. They give you regular monthly income just like Fixed Deposits (FDs).

Many investors don’t know that MIPs are different financial products than the Bank Fixed Deposits. Basically MIPs are the type of mutual funds. They fall under the category of Hybrid Mutual Funds means they invest up to 25% of your money in Equity and up to 75% money in debt and debt related products.

The equity component of MIPs give you the growth of your money while debt gives you the regular income. The main advantage of MIPs over FDs is that, they can give you market driven returns.

If market is good, most of the MIPs will give you more return than the regular bank FDs.

MIP returns are market-driven. That means, the fund manager is under no obligation to declare a monthly dividend, though most fund houses try their level best to declare dividends regularly.
This is the main difference between MIPs and fixed deposits (FDs) that offer assured interests.
However, compared with FDs, MIPs are tax-efficient as dividends declared under MIPs are tax-free.

Who can go for MIPs?

Anyone who want to generate almost fixed returns from their investments more than the regular fixed deposits can invest in MIPs. If you are a retiree and already invested in Bank FDs than you can invest in MIPs also.

Many people argue that, equity is a risky investment so weather MIPs are really safe or not? Well, it is true that equity is the risky investment. But the equity exposure in MIP is low (maximum 25%) so in my opinion, you can go for it. There is no problem in it.

How To Get maximum Returns from Company Fixed Deposits in India?

How to Get Maximum Returns from Company Fixed Deposits in India?

The inflation is the major killer of your wealth put in the fixed deposits. The fixed deposits earn only 6-8% of annual interest income while the inflation rate in India right now is 12-14% per annum and it means that your FDs are actually reducing the purchasing power of your wealth right now.

So What is the Answer of this problem? Well, The answer is – Company Fixed Deposits.

The main advantage of corporate fixed deposits is that, they offer higher interest rate than the regular bank fixed deposits. And that’s why you can earn more money from the company FDs.

Recently, the corporate deposits have seen the inflow in it. Because in past several months the Sensex has sky rocketed and given the investors excellent returns and that’s why the smart investors are now booking their profits and shifting their profits to the Company fixed deposits to earn higher fixed income.

On and average AA-rated company fixed deposits offer 2% higher returns than the regular bank fixed deposits which is really a good thing.

However, keep in mind the following things before investing in Company FDs

- Always see the bond ratings before investing – AA or AAA bond ratings are the best

- Know the risk

- See the profits of the company before investing in FDs

- Ask your financial advisor before investing in the FD

- See the review of that FD on the internet before investing

- Divide your money in different FDs

- Just because the company FDs offer higher returns, it is not the absolute indication of investing in it.

- Invest MAXIMUM 10% of your total portfolio net worth in the company FDs

If you keep in mind the above criterias, than the Company FDs will be a lucrative investment vehicle to generate fixed regular income for you.