Lock into two-year bank deposits that offer 9.5 per cent, deposits from top rated NBFCs that fetch you 10 per cent and the five-year National Savings Certificates.
With FIIs rushing to the exit door, equity markets are tumbling and bond markets are gyrating too. But here are some debt options which today offer safety with excellent returns.
Not long ago, interest rates on bank deposits were thought to have peaked and were expected to decline.
Today, it is a different story. The RBI’s recent measures to tighten liquidity have led to a sharp rise in short-term interest rates.
As a result, as many as six banks have raised deposit rates this week. With this, the number of banks that have increased deposit rates since the beginning of this month has moved up to 27.
We sifted through rates offered by banks on deposits across various timeframes and compared these with top-rated corporate/non-banking finance company deposits and post office schemes.
Here are some safe options we arrived at for different investment needs, which would also maximise your returns.
FOR LONG-TERM INVESTORS
Although most banks have been increasing short-term interest rates (i.e. rates for deposits of less than a year) in response to the RBI’s moves, long-term investors too stand to gain from the rate revisions by banks.
While rates for periods less than a year are in the ramge of 6.5-9.25 per cent, recent revisions have seen Karur Vysya Bank (KVB) and Andhra Bank offering 9.5 per cent for one- to two-year deposits. Lakshmi Vilas Bank (LVB) offers 9.5 per cent for one-year deposits. After the revision on August 19, Tamilnad Mercantile Bank offers an interest rate of 9.5 per cent across maturities of twelve months-five years.
Those seeking regular return on investments too, can consider bank deposits over the post office Monthly Income Scheme, which offers only 8.4 per cent interest.
While most banks offer quarterly interest payouts, some offer monthly payouts, too.
FOR SENIOR CITIZENS
With most banks offering an additional 25-75 basis points on deposits by senior citizens, those above 60 years of age can now earn double-digit returns.
Andhra Bank (one to two year deposits) and LVB (one year deposit) for instance, now offer 10 per cent interest to senior citizens.
Seniors who don’t have taxable income and are particular about regular inflows can choose deposit options that offer more than the 9.2 per cent given by the Senior Citizens Savings Scheme (SCSS).
Like the SCSS, all banks today offer quarterly interest pay-outs.
Several banks such as Bank of India, IDBI Bank, Indian Bank, Indian Overseas Bank, Axis Bank, YES Bank, Karnataka Bank and Dhanlaxmi Bank offer 9.5 per cent on five-year deposits for senior citizens. You can invest in these or lock into deposits which offer higher rates than the SCSS for durations shorter than five years.
Deposits in all commercial banks are protected by the Deposit Insurance and Credit Guarantee Corporation.
In case a bank fails, each depositor is insured up to Rs 1 lakh for both principal and interest put together. This makes bank deposits a safe investment option.
But do note that investments in post-office schemes up to any amount are risk-free as it is backed by the Government.
FOR HIGHER RISK-TAKERS
Unlike bank deposits, corporate and other finance company deposits are not covered by insurance.
Hence these are considered more risky. Nevertheless, we consider only deposits with the highest AAA rating by various rating agencies.
Instruments with AAA rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. They carry the lowest credit risk.
While many AAA deposits such as from Gruh Finance, LIC Housing Finance, Sundaram Finance and HDFC are open currently, only deposits of M&M Financial Services (cumulative) offer higher interest than banks in the two- to five-year time period. Others offer rates in the range of 8.75-9.5 per cent.
In this context, deposits from M&M Financial, a subsidiary of M&M, offer an attractive option at 10 per cent (two years), 10.25 (three years) and 9.75 per cent (four and five years).
It also has an offer for 18 months at 9.75 per cent, unmatched by any bank special deposits.
For those looking for regular payouts, the two- and three-year offers are attractive at differential rates of 9.75 and 10 per cent, respectively.
Those with a higher risk appetite can choose to invest in this non-bank deposits.
Senior citizens get additional 0.25 per cent in M&M Financial deposits, making the two- and three-year options (cumulative) and three-year option (non-cumulative) attractive.
Sundaram Finance is the only other non-bank offering 10 per cent returns (two, three years) to seniors, equal to that of banks such as Andhra Bank.
FOR TAX-SAVERS
If you are in the 20 and 30 per cent tax slabs and if tax efficient investment is foremost in your mind, then there is nothing to beat the humble five-year NSC.
Part of the small savings schemes of the post office, investments up to Rs 1 lakh in the NSC are also eligible for tax deduction under Sec 80C.
On first perusal, the 8.5 per cent interest rate on the five-year NSC is unattractive in comparison to rates on tax-saving deposits of banks, the best of which offer 100 basis points more (after recent revisions).
But where the NSC gains an edge is in the fact that only the interest earned in the last/fifth year is subject to tax. The interest of the first four years is assumed to be reinvested each year.
On the other hand, even if you invest in a cumulative deposit, FD interest earned each year is taxable. This pushes down the post-tax yields on FDs vis-à-vis the NSC (see accompanying table).
Therefore, the NSC, with post-tax yields of 13.4 per cent (for 20 per cent tax slab) and 16.4 per cent (for 30 per cent tax slab) is still a better investment option than tax saving bank deposits — whether you choose the highest 9.5 per cent tax-saver deposits of LVB, 9.25 per cent tax-saver deposit by City Union Bank or even 9 per cent tax-saver deposits offered by many others such as Dhanlaxmi Bank, Karnataka Bank and State Bank of Mysore.
Similarly, seniors in the 30 per cent tax bracket will still earn greater post-tax yields if they invest in the NSC, even in comparison with the tax-saver deposits of Axis Bank, which offers one of the highest rates of 9.75 per cent.
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