Invest in FDs now before rates fall in future
As expected, the RBI has cut the repo rate by 0.25% in the policy review announced today. However, the cash reserve ratio (CRR) is kept unchanged.
Bankers have clearly said that the interest rates will not come down immediately despite the “widely expected” rate cut by the RBI. But that does not mean the rates will not come down in future.
In yesterday's post we spoke about the Reserve Bank of India's monetary policy and it's impact on your money. And we mentioned that depositors also have a chance to mitigate the impact of a likely rate cut on deposits. Here is how you can save yourself from a likely dip in FD rates.
1) Factor in the re-investment risk
Even as the bankers don’t expect an immediate fall in interest rates, all macro economic factors indicate that the rates will go down in future. Hence, you should opt for a longer tenure fixed deposit if you are not clear about the time horizon for the investment. This will help you avert the “reinvestment risk”.
The term re-investment risk describes a situation in which an investor will have to settle for lower interest rates on FDs when their deposits come up for renewal.
For example, you may opt for a one year fixed deposit since the rates are 25 basis points higher than a fixed deposit of 1-3 years. But when you reinvest the money after 1 year, the deposit rates then may be much lower than the rates offered by banks and companies now.
Hence it certainly makes sense to invest in a long-term FD with a tenure of five years or more.
2) Split the money in multiple FDs
If breaking a FD in case of an emergency is a concern, you can split the money into 2-3 FDs of different tenures. You can keep a smaller amount in a 1 year FD and higher amounts in 3-5 year FDs. The logic is, in an event of emergency you can break one FD and pay a penalty or lose interest only on that amount. The other amount will be intact. That way you can combat the reinvestment risk and accumulate interest on a long tenure FD.
No comments:
Post a Comment