As interest rates are expected to fall, investors may want to consider locking in higher returns by investing in top-rated corporate deposits or small finance bank fixed deposits (FDs). Corporate FDs typically offer 150-200 basis points (bps) higher returns than those of public sector banks, while small finance bank FDs offer 100-150 bps higher returns.
Experts recommend depositors consider FDs with maturities of three years or more to minimize the risk of interest rate fluctuations. For example, State Bank of India offers 6.5% for a 5-year FD, while Shriram Finance and Jana Small Finance Bank offer 8.47% and 8.2%, respectively, for the same tenure.
Corporate deposits can be offered in cumulative or interest-generating options, with the latter providing liquidity at fixed intervals. Depositors should consider their investment horizon, liquidity needs, and risk appetite when choosing the deposit tenure.
The key is to check the credit ratings of the deposit-issuing companies, with AAA-rated companies being a good option. Adhil Shetty, CEO of Bankbazaar, suggests that corporate deposits are suitable for those looking to boost their fixed income returns.
Small finance banks, categorized as scheduled banks, offer higher capital protection and may provide similar or higher returns than corporate FDs. Spreading deposits across multiple banks can help investors maximize insurance coverage and ladder FDs across multiple maturities, says Gaurav Aggarwal, chief business officer of Unsecured Loans, Paisbazaar.
Given the expected downward trend in interest rates, investors may want to lock in higher rates for 3-5 years to mitigate the risk of interest rate fluctuations. Ultimately, the right approach depends on an individual’s financial goals and liquidity needs.