Can your return beat the 7% interest rate offered by HDFC, ICICI and Axis Bank? | Jobs Vox


Bank fixed deposit (FD) rates have been on the rise ever since the RBI started increasing the reserve ratio to tackle high inflation. This has brought bank FDs back on investors’ radar after a long time. And for good reason. FDs are easier to invest in, less risky, and are now offering attractive rates.

The RBI raised its benchmark rate by 40 basis points earlier in May. Following five consecutive hikes between May and December, the rate of return rose from 4% (prior to May) to 6.25%. Alongside this, with credit growth outstripping deposit growth, banks are increasing their deposit rates to attract more depositors.

While leading private sector lender HDFC Bank offers 7% per annum on most of its deposits, the bar has been set high for other smaller banks. Many investors want to buy higher FD rates in banks and sometimes they go for banks with smaller deposit base or better finance but higher interest rates. That argument is no longer true today when one of India’s largest banks has set a higher limit. AAA-rated deposits from well-established NBFCs provide another point of comparison. Take Sundaram Finance for example, which offers 7.15% on 1-year and 2-year, and 7.30% on 3-year compound deposits – not significantly different from the FD rates of major banks. Another well-known NBFC, Bajaj Finance offers rates ranging from 7.05% to 7.95% on aggregate deposits with tenors ranging from 1-year to 5-years. A maximum of 7.95% is offered only on special 44-month deposits and the next highest rate is 7.75%.

Still still

HDFC Bank revised its deposit rates on December 14, and now offers a maximum rate of 7% on deposits of 15 months to 10 years. Note, other popular private sector banks like ICICI Bank and Axis Bank are also offering this rate. ICICI Bank is offering up to 5-year deposits of 7% in 15 months, beyond which the rate is as low as 6.9%. Axis Bank is offering 7% on 2-year to 10-year deposits. All these rates are applicable on deposits below Rs. 2 crores.

Going back to April, before RBI’s rate hike, HDFC Bank and ICCI Bank were offering a maximum rate of 5.45% and Axis Bank’s one-year deposit was 5.75%. five years. In fact, even if we take all the scheduled commercial banks from the private sector and the public sector, the maximum rate offered on FDs was only 6.5%. This is deposit information for selected maturities (up to 5 years only) in Bank Bazaar.

Investing in 1-2-year deposits

Should you invest in 1-2-year FDs from leading banks when the spread of deposits looks attractive? While such FDs may offer you the value of a long-term deposit (perhaps even better in some cases), they also expose you to reinvestment risk. Because once these FDs mature in a year or two, you will have to explore other options to reinvest this money. Depending on where interest rates are at the time, you may get a better or worse deal. While it is difficult to predict exactly where interest rates are headed, Anil Gupta, senior vice president and head of the firm’s group – financial sector ratings, ICRA offers some guidance. “FD rates are yet to reach pre-Covid levels. There is a major room for further rate hikes as the banking system is likely to increase liquidity in the coming months. This coupled with an expected rate hike by the RBI in February 2023 may prompt banks to increase deposit rates by 50-75 basis points in the coming months. months) down the line. So, while 1-2-year FDs may offer attractive rates, reinvestment risk is something to consider.

Debt funds as an alternative

In fact, if you have a longer investment horizon (3 years or more), debt funds may be a better option after tax. This is especially true if you are in the higher income tax bracket of 20% or 30%. Because if you invest in debt fund for 3 years or more, your return (long term capital gain) is 20% with index benefits. This can significantly reduce your tax liability.

In fact, unlike returns from fixed FDs, those from debt funds are market-linked. Interest rates between the time you enter and exit an open-ended debt fund affect your returns. One way to achieve this is to invest in a Target Maturity Fund (TMF). These fixed maturity and high credit quality debt funds provide a reasonably predictable level of return (known as an indicative return) to those invested until maturity. TMF invests in bonds of a specific index and has the same maturity as the index it tracks. The fund’s yield to maturity (YTM) ratio minus the expense ratio responds to your indicator. For example, take TMFs such as Edelweiss MF, where daily updated YTMs are readily available. These are offering YTMs of 7.37% to 7.45% for funds with maturities of 3.5 to 4.5 years. A number of mutual fund houses offer TMFs in a wide variety – with different maturities and portfolio composition – giving investors enough options to choose from in this space.

Deposit for senior citizens

When it comes to senior citizens, bank deposits can still be an attractive option. Take HDFC Bank for example, which offers 7.75% on deposits for senior citizens (60 years and above) for a tenure of 5 years, 1 day to 10 years. If you are a senior citizen in the corpus of Rs. 1 crore, then you can earn interest income of Rs. 7.75 lakhs annually for the next 10 years. Assuming you are under the old tax regime and have no other income, your tax liability (including health and education allowance) comes to Rs. 67,600 per year, that is, the effective tax rate is only 8.7% (see the table). This is based on the tax calculation on the Income Tax website.

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