Synopsis: SBI has increased FD interest rates by 75 basis points, making fixed deposits more appealing. However, experts advise that the decision to switch from debt mutual funds to FDs should be based on individual investment goals and risk tolerance.
SBI has increased FD interest rates, offering guaranteed returns.
Investors should consider their goals and risk tolerance before switching from debt mutual funds to FDs.
SBI has raised FD interest rates by 75 basis points, enhancing the appeal of bank fixed deposits.
However, experts advise that the decision to switch from debt mutual funds to FDs depends on individual investment goals and risk tolerance.
"FDs offer guaranteed, fixed returns, providing a predictable income stream, particularly attractive in volatile markets. They are generally safer, being less affected by market fluctuations and covered by deposit insurance up to Rs 5 lakh. However, debt mutual funds can offer higher returns in favorable market conditions and tax advantages on long-term investments. Therefore, the choice should align with your specific financial objectives and risk tolerance," said Chakravarthy V., Cofounder and Director, Prime Wealth Finserv.
"Fixed deposits are suitable for debt mutual fund investors seeking fixed interest without short-term volatility. Interest rates are expected to decline with lowering inflation and a stable government. Investors can lock in current rates but should carefully map fund requirements with the maturity period," recommends Rajesh Minocha, a Certified Financial Planner (CFP) and Founder of Financial Radiance.
SBI FD Interest Rates:
46 to 179 days: Increased by 75 bps from 4.75% to 5.50%.
180 to 210 days: Increased by 25 bps from 5.75% to 6%.
211 days to less than 1 year: Increased by 25 bps from 6% to 6.25%.
FD vs. Debt Mutual Funds:
Fixed deposits are low-risk investments offering guaranteed returns over a set period, while debt mutual funds carry higher risk due to interest rate fluctuations.
Taxation differences also exist: tax-saving FDs are exempt under Section 80C of the Income Tax Act, while debt mutual funds are taxed according to the individual's income tax slab rate following the Finance Bill 2023 amendments.
Fixed deposits incur TDS on maturity, whereas debt mutual funds do not; tax is paid only upon redemption of units.
Investment Strategy:
"For short-term money needs (less than three-year maturity) and emergency funds, combining fixed deposits and debt mutual funds is beneficial. Fixed deposits can be closed prematurely with a penalty, providing immediate liquidity," suggests Minocha.
"To maintain a balanced portfolio, diversify investments between FDs and debt mutual funds. This balances the safety and guaranteed returns of FDs with the potential for higher returns from debt mutual funds. Short-term goals are better served by FDs, while debt mutual funds suit medium to long-term goals," said Chakravarthy V., emphasizing the importance of liquidity needs.
Allocation Recommendations:
Conservative investors: 60-70% FDs, 30-40% debt mutual funds
Moderate investors: 40-50% FDs, 50-60% debt mutual funds
Aggressive investors: 20-30% FDs, 70-80% debt mutual funds
Gilt Fund Performance:
ETMutualFunds analyzed gilt funds, which must allocate 80% of their corpus to government securities, making them a safer investment.
In the last three years, gilt funds averaged a 5% return, with ICICI Pru Gilt Fund and SBI Magnum Gilt Fund both offering 5.93%.
Over five years, the average return was 6.41%, with ICICI Pru Gilt Fund leading at 7.57%.
Outlook for Debt Mutual Funds:
"Rising interest rates can impact the NAV of debt mutual funds in the short term, but higher yield issuances may benefit these funds long-term. Historically, debt mutual funds have outperformed FDs over similar maturities, offering better tax efficiency on long-term capital gains, especially for those in higher tax brackets," said Chakravarthy V.
"The 10-year bond yields dropped below 7% last month. With political stability and controlled inflation, there is a high possibility of reduced interest rates in the future. Investors with a long-term horizon can invest in long-tenure debt funds, while those with a short-term horizon should stick to liquid, ultra-short, and money market mutual funds," advised Rajesh Minocha.
Always consider risk appetite, investment horizon, and goals before making investment decisions.
In conclusion, SBI's hike in FD interest rates offers attractive guaranteed returns, but investors should carefully evaluate their investment goals and risk tolerance before switching from debt mutual funds to FDs.
While FDs provide safety and predictability, debt mutual funds offer the potential for higher returns and tax benefits.
A diversified approach, balancing both investment types based on individual financial objectives, liquidity needs, and market conditions, is recommended for optimal financial planning.
Always consult a financial advisor to tailor investment decisions to your specific needs.
Disclaimer: Recommendations and opinions by experts are their own and do not represent the views of ICCBIZNEWS.
