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Fixed strategies

With banks lowering interest on FDs, Arnav Pandya tells how to get the best out of this investment instrument.

india Updated: Aug 28, 2007 00:27 IST

Bank fixed deposits (FDs) that had seen a rise in rates at the start of 2007 with the figure touching double-digits for some maturities, is now on a moderation part with several banks realigning rates. In such a situation the investor has to be clear about the kind of strategy that will be followed in order to get the maximum out of the deposits.

Look long term
The current trend shows that interest rates are going down on deposits with shorter time maturities. This means that the investors will have to take home lower returns for these short-term deposits than what they were earning 3-4 months ago. Opportunity is still available for someone who is looking to earn a higher amount from bank deposits over a period of time, as the rates have not fallen for the longer-term deposits in all banks.

What to do

Look for long-term deposits to get higher rates
Understand the realignment of rates
Select the right time-period
Be ready for a lock-in
Be on the lookout for some specific window of opportunity

Change in time periods
There is a need for people to look beyond the rates, as the time period for which this is applicable is very important. Several banks have actually restructured their slabs, which mean that earlier if the 8.5 per cent rate was available for five years and above now this might be available for a period of 3-7 years and for periods above this the rate might be 8.75 per cent. This creates an opening for the investor whereby they can ensure that earnings can still be high with smart planning during the time period.

Spot the opportunities
Not every bank has changed the rate or matched the downward fall that the rates have witnessed. Study the offerings of all banks carefully and look out for some opportunity present where a particular bank is offering a higher rate for a specified time period. This can prove to be crucial, as it will ensure that there is a good return being made available for the individual.

Lock-in
There might be a provision for a lock-in for several offerings from banks but this is usually compensated by a slightly higher rate of return.

The investor has to make the necessary choice in this regard and then decide whether they can afford to invest the sum for the specified time-period and suffer a bit of a lock-in but still ensure that they earn a high rate of return on their fixed deposit.

(The writer is a Certified Financial Planner)