Interest rates have been steadily moving higher over the last few quarters. However, should you park your money in fixed deposits now or wait for further hardening of the interest rate cycle?
Fixed deposit interest rates have been steadily moving higher over the last few quarters. With rising crude prices and falling rupee, all indications are that this trend is likely to continue for some more time. This is certainly good news for investors who are risk averse and likely to park their money in fixed deposits.
However, the important question is: Whether one should park money in fixed deposits now or wait for further hardening of the interest rate cycle?
“In my opinion, investors should go ahead and lock their money in fixed deposits with the longest possible duration right away. This of course should be the money not needed for some years and also the part in their asset allocation reserved for fixed return instruments. The reason is that in a rising interest rate scenario, banks usually give higher rates of return on longer-duration deposits,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
He adds that in case you keep the money idle for some time hoping that rising interest rates will offer better opportunities going forward, then money which is lying will earn negligible interest for the interim period. This will more than compensate for the somewhat higher rate deposit that you get later on.
Another factor to be considered is that though interest rates are likely to move higher, but interest on deposits may not necessarily go up in a hurry. Banks usually take a lead time in raising interest rates on their deposits. Therefore, the argument for holding back your fixed deposit allocation in favour of short-term deposits holds true only when the interest rates are at the bottom or have just started moving higher.
“At present they are nowhere near the bottom and have travelled northwards for some distance already. Hence, the present time offers a good opportunity for depositors and they should take advantage of higher interest rate expectations to book deposits for durations as long as possible,” informs Kapur.
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