With lowered interest rates, are bank FDs only solution?

Interest rates on deposits in banks have reached an all time low. There is no chance of getting more than seven per cent interest for five-year term deposits. Added to this low interest rate is inflation, after which, the depositor will get very little in return on maturity of the deposits. If your bank term deposits have reached their maturity and you are planning to deposit again, know these alternatives.

There are two 'devils' in Indian economic system, that grab the fruits of bank interest rates. One is inflation and the other is Income tax. Inflation in India is between four and five. While you earn seven per cent interest rate on fixed deposit and pay tax for slab rate of 30 per cent, you will get back just five per cent interest on your deposit. If this is seen terms of inflation, it is nothing. That is why it is necessary to look out for ways to make deposits that will give high returns, with a good interest rate.

Government bonds
These are released usually by Public Sector Units (PSUs). The rate of interest is eight per cent. Moreover, these are secure, with surety from Central Government. The lock-in period is six years. Interest amount is taxable. This depends on the slab rate of the depositor. You can invest in these bonds through banks or any financial agencies. There is no maximum limit. However, if you need money urgently, you cannot close these bonds. They are not trading in stock exchange. They are also not transferable. You will have to wait till the term ends.

Corporate fixed deposits
Companies collect funds necessary for their business, in the form of deposits. This is one of the ways to get funds. Rating companies give ratings to these corporates, for the security of the deposits made. Corporates with 'AAA' ratings have high security. It is good to invest in these. The interest rates are high. The interest rate on deposits in corporates is one or two times more than that of bank fixed deposits. Senior citizens get 0.25 per cent more interest than the others. For example, Sriram Transport Finance will offer 8.25 per cent interest on 5-year deposit. Bajaj Finance offers 8.05 per cent. LIC Housing Finance offers 7.95 per cent interest rate.

Small-scale Savings scheme
Post office savings schemes make better offers than banks. National Savings Certificate (NSC) five year deposit is easy. Interest rate on these is eight per cent. Even those whose income attracts high IT can benefit with at least 5.6 per cent returns. For long-term deposits, Kisan Vikas Patras can be looked into. Deposits kept for 9.4 years will be doubled on maturity. Even Provident Fund attracts attractive interest rates. Even though the rate of interest is 8 per cent, as it does not attract IT, the returns will be high. It is profitable as no taxes are charged for the investments, amount of interest or final maturity amounts. Even if five per cent inflation is subtracted, the depositor gets three per cent interest amount.

Debt Fund
Returns from debt funds are more than that of banks FDs. Liquidity is possible anytime with debt funds. However, this too changes depending on the fund. The returns on debt funds depend on the market trends. Which means there is a certain risk involved. But if you choose a popular Fund House and an efficient Fund Manager, the risk factor is reduced. Another advantage of debt funds is that after investing for three years, there might be tax reduction in proportion to the inflation rate, from the amount at maturity. With this, debt funds have become attractive.Debt funds are deposited in government bonds, corporate deposits and money market instruments. They will fetch 9.5 per cent interests, on deposits between three to five years, at a rate of interest of seven to nine per cent, within a year. If the deposits are withdrawn before one year, you will have to pay one per cent tax. Those investing for three to five years will earn better interest rates. Deposits in debt funds could be invested in three ways:

Fixed Maturity Plan: It is like a fixed deposit-close ended. The money cannot be withdrawn until a fixed period. Deposits can be made from one year to three years.
Corporate Bond Fund: These are bonds released by companies that are rated as high and very high. Rich yields can be expected which are also secure. These are open ended. Doors are always open for more deposits.
Credit Opportunities Fund: These are like corporate bonds. However, investments are made in low credit rating firms, to offer more returns.

Why bank FDs are attractive?
Safety and security are the key factors. There is clarity on how much you will get back at the end of the term. There is the facility to withdraw the deposits whenever you like, even before the term ends. Most people favour bank FDs for these reasons.

Disadvantages of bank FDs
The interest rates are fixed on Fixed Deposits. Since the day the investment is made to the day of maturity, the same interest rate is continued. This means, even if the rate increases, there will be no changes. If inflation increases, the returns are even lower. The interest amount is taxable. Even though you can withdraw your deposits anytime, banks will fine you for it. This changes according to the remaining term and the banks.