Which Fixed Deposit is the best
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We wrote a post earlier on fixed deposits titled ‘Should I open a fixed deposit‘. An obvious follow up question to that would be ‘Which Fixed Deposit is the best’.
Usually we just go onto Google and search for ‘banks with highest interest rates’. But tell me, do we really open an account with a bank that we know nothing about just because we see that they’re offering 0.25% more on a fixed deposit? The highest interest earning banks are usually co-operative banks or region-specific small banks. Those are often ruled out at a glance. The major banks all have similar interest rates. And more often than not, even if you see a slightly higher interest rate with a particular bank, it’ll be brought down at par the next time the rates are revised.
To be honest, 99% of us just look for interest rates on Google as a comparison point with what our bank offers. We don’t look it up in order to change our primary bank. That is, unless we are actually shopping for a different bank to move our relationship to, and even then, the fixed deposit rates are not going to be the game changing factor. Proximity, features, service, and safety are going to be crucial for that decision. And for employees, your salary account will more often than not become your primary banking relationship. So let’s approach this question from another angle. Don’t open a new account with another bank just for that 0.25 or 0.5% additional interest rate. Unless we invest in crores, that % is not going to make a huge difference. Instead, look for traditional deposit options secured by the government if you’re looking for stability. There is a post coming up about what % of your funds should you park in each category – equity, debt etc, and how you should change that as you grow older. That should help you decide if you’re in line with what the experts recommend.
If you decide to invest 30% of your savings into a fixed deposit, park some of it in a lock-in instrument like a post office deposit or a fixed-tenure government bond (Kisan Vikas patra or the kind). These instruments don’t allow you to exit easily. That is good, as otherwise we will keep fiddling with that money. And in case of an emergency, ofcourse you can exit it or even take a loan on top of it. These deposits typically earn upto 1% more than what your bank offers. Sometimes it could be even more. But there is a limit to what one can invest in these instruments as the Govt is picking up that additional interest tab. Use it up to the full extent. Govt bonds also allow for tax savings as an additional benefit to the investor. Invest as much as you can into your provident fund account. If you’re a private employee or a professional, open a PPF account through your primary bank and invest the max allowed amount each year. You get tax benefit and also a much higher interest rate. While PF isn’t locked-in, there is a lock in for PPF accounts for 15 years, but you can take a loan on it anytime you want. Where will we get a ~8% interest rate today otherwise!
If you’ve maxed out investments in all the above options, or if you need a more liquid deposit, look at your bank’s 2 year term deposit. Often, that is the sweet spot – where you get the max interest. Currently it is around 5.2-5.5% for most banks. That doesn’t seem like much, does it? So look at ways in which you can maximise benefit from your fixed deposit. There’s a post titled ‘Making the most of your fixed deposit‘ in which we talk about how you can leverage your deposit to your benefit. That should make for interesting reading. Most modern banks have a flexi-deposit option in which you don’t actually need to open a fixed deposit each time. Once the balance in your savings account crosses a certain amount – say ₹1,00,000, the system creates a deposit for the additional money. You should be able to see it on your dashboard when you login. If you need to withdraw, you don’t need to do anything – just swipe your card / withdraw at an ATM / make a transfer, and the deposit will automatically be adjusted to give you instant access to your funds. Having a flexi-account will give you the best of both worlds – instant access to your money as well as earning a higher interest rate on your money. Ask your bank to convert your account into one.
To recap, since rates on deposits are falling, make the most of the higher interest rate options secured by the government – post office, infrastructure bonds etc, PF / PPF, and convert your account to flexi. After that if you still have additional money, go in for a 2 yr option with your bank, and look to unlock benefits from that deposit.
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