Benefits of fixed income option

Home buyers may be disgruntled with the spate of rate hikes by the Reserve Bank of India (RBI). But there are others who are all excited - the conservative fixed income investors. The reigning fixed deposit (FD) rates offered by banks are the highest in recent times. In the current turbulent stock markets and skyrocketing gold price, the lure of assured handsome FD returns is fathomable.

Some banks offer as much as 10 per cent on deposit tenure of one to two years. Most banks offer around 9.5 per cent for three to five year tenures. You must choose the tenure depending on your liquidity requirements, risk appetite and financial goals. Those who have only long-term goals like saving for their children's education or marriage can lock their money in bank FDs that give the highest returns over a long tenure. If you need money in the next one year, select the deposit tenure of a year.

An investor's risk appetite is a major factor that determines his exposure to varied instruments ranging from fixed income to volatile equity. A person with moderate risk appetite may reduce his exposure to equity now and invest in lucrative bank FDs. He still maintains equity investments with the hope that they will bounce back in the coming months and yield manifolds. Senior citizens or the more conservative investors shun market turbulence and prefer to have a large share of their money invested in FDs.

Further, spiraling inflation has compounded the woes of small investors. High food inflation coupled with rising fuel prices has chewed away a large part of the disposable incomes. Technically, returns from FDs in times of high inflation (inflation adjusted returns) aren't so enticing for aggressive investors. However, with the probability of further increases in rates, bank FDs are an option worth exploring.

Fixed income products such as bank FDs that are held for long periods carry with them a formidable reinvestment risk. This risk crops from the uncertainty over future interest rates. What can an investor do when his FD matures and he finds out that the current rates offered for similar products is much lower?

One can invest systematically in fixed income products with different maturities. This technique is called laddering. It not only minimises reinvestment risk but also allows an investor to have cash flows at regular intervals. Parking your entire money in a FD with a fixed maturity date is not advisable. If the interest rates go up, you will be locked in the current FD rate and cannot benefit from the higher rate. On the contrary, if the rates go down you will be glad you locked your money in the FD at a good rate.

Since it is impossible to determine what would be the interest rates after say 2-3 years, laddering is a safe and prudent way to invest in FDs.

Banks offer a higher interest rate on tenures of one to two years. Investors with a low risk appetite will find the assured returns of a fixed deposit attractive in the present market conditions. Long tenure deposits carry a risk – the rate prevailing at the time of maturity and applicable on renewal may be lower than the current rate on offer.

For more information visit to: http://fixeddepositindia.blogspot.com/

Get the most out of your fixed deposit investments

One of the main questions for investors in fixed-income instruments is the manner in which they should tackle the present situation on the interest rate front. The Reserve Bank of India (RBI) has recently increased interest rates and this will impact all individuals who are investing in fixed deposits. There is, however, some work that needs to be done before this entire process is completed and, hence, here are some of the steps that they need to take on this front.

Do not rush: One of the first things that the individual has to do is to ensure that they act only after they have all the necessary information with them. The tendency for people is to rush to complete an investment whenever they hear about a specific point and that is something that the investor must avoid at this stage. One of the reasons for this is that while, the RBI has indicated higher rates in the economy, the banks have not yet acted on this in all cases. This could mean a situation whereby the action on the interest rate front could actually be visible after a period of time. This would result in a situation where the rate could change after some time and, hence, if there is a rush to get into the deposit at this stage without checking the bank’s action, then there could be a potential loss of opportunity in the times ahead.

Check bank details: The other thing that the investor must do is to check the position with the specific bank where they are planning to invest the fixed deposit. The details that they need to check is the times when the bank has raised rates and what the present rate for different maturities are and how these actually stand up with respect to the other banks around them. This is important, because, unless, this kind of information is known, there could be a decision made on incomplete information that might not be the best one. This can also give an indication as to when the rate rise can be expected if any and how this will impact them as to when the deposit is to be made.

Think about maturity: The investor also needs to think about the time maturity of the fixed deposit that they will invest in. This is important because they need to make the most out of the situation of high interest rates. The idea for the investor is to ensure that they are locked into the deposit with a longer-term maturity so that they will be able to earn a higher rate of interest continuously for a longer time period. If they choose a deposit with a short maturity, then they could find that they have ended the investment after a short period of time and then, they have a lower interest rate that they will earn from then on.

Existing investments: There are also the existing investments that need to be taken into consideration. If there are existing deposits that are already earning a high rate of interest, then it does not make much sense to do anything with them. However, if there are some that are coming to an end, or, that there is a very low rate of interest on a few of them, then there has to be action on this front. This will ensure that the entire fixed deposit portfolio is in tune with what is required and it is earning a high rate of interest. This kind of alignment will be better for the investor and will help them in their overall efforts.

For More infornmation visit - http://fixeddepositindia.blogspot.com/

[Source- mydigitalfc]

You can now use your fixed deposit to get a loan

With lending rates rising steadily, you would think twice before taking any kind of loan. In fact, in case you really need the money, you would think of liquidating your assets first instead of paying high rates on a personal loan. But there is one asset that you wouldn't want to liquidate - fixed deposits (FDs).

You can now find a solution within the product without liquidating it. FDs give you the option of taking a loan against the secured amount and provide the overdraft facility, wherein you can withdraw more than your deposit. "Instead of breaking a high-interest FD, it's better to take a loan against FD," said Suresh Sadagopan, a Mumbai-based financial planner.

Why does it work for you?
Advantage over personal loan: While a personal loan can cost you around 20% per annum, loans against FD charge an interest rate that is a little higher than the rate you are earning on your deposit.

Advantage over liquidating FD: Even at the cost of 1-2%, it makes more sense than liquidating the asset. To liquidate an FD, most lenders will charge you a premature withdrawal penalty. Usually, the penalty for breaking an FD is 0.5-1% and it is applicable for the period the deposit has remained with the bank.

Suppose you have an FD of Rs 1 lakh for two years that earns 9.3% per annum and decide to break it after six months. If the 180-day FD has an interest rate of 7.0% and the premature withdrawal penalty 0.5%, you will get an interest rate of 7.0% minus 0.5%, or 6.5%, on your deposit. So at the end of six months, your interest would come to Rs 3,229 at 6.5%.

If you had remained invested for two years, your Rs 1 lakh would have grown to R1.2 lakh at the end of the tenor. But if you had taken a loan of Rs 90,000 at the end of six months at 10.5% and repaid the principal at the end of 1.5 years, you would have paid around Rs 15,280 as loan interest and the net interest income (total interest income minus cost of loan) at the end of two years would be Rs 5,555. So there is a profit, while the principal remains intact.

Watch out for
Right to lien: Most banks will not let you close the deposit when you are availing the loan. Moreover, some banks specify that they can use any other deposit that you may have in the bank to settle loan dues in case of a default.

For More information visit - http://www.fixeddepositindia.blogspot.com

[Source -Hindustan]

HDFC Bank hikes FD, lending rates

There's good news for those who are risk-averse and prefer to keep their money in bank fixed deposits (FDs). From Monday, HDFC Bank will pay a higher interest rate for FDs of more than 45 days. The bank has hiked FD rates by up to 100 basis points (100 basis points = 1%), sources said.

The bad news, however, is that the leading private sector bank has decided to hike lending rates by up to 75 basis points, also effective Monday. This implies that existing and new customers of auto and personal loans will need to shell out more. Corporate loans will also become more expensive. However, home loan customers won't be affected since they are tied to lending rates of HDFC which were last revised on March 1.

Over the past one year, the rising rate of inflation has compelled banks to hike rates by about 500 basis points in some cases. Top bankers say that by all indications, interest rates have not peaked yet. The RBI policy review scheduled for this week could see another round of hike in key rates, putting pressure on banks to go increase rates further.

According to the hiked FD rates, HDFC Bank will pay 9.25% annual rate of interest for FDs of two years 16 days to regular customers, while senior citizens will earn 50 basis points more, i.e. 9.75% in this case. For every tenure, senior citizens will earn 50 basis points more than regular depositors. The steepest hike in rates will be in the shorter tenure of 46-90 days, where the new rate will be 5%, up from 4% earlier.

HDFC Bank has also decided to hike its base rate by 50 basis points to 8.70% per annum while its new prime lending rate (PLR) will be 17.25%, up from 16.50% earlier. Surprisingly, HDFC Bank is hiking its base rate within a month of its last hike. On February 24, the bank had hiked its base rate from 8% to 8.20%. However, the hike in bank's PLR is coming after about three months. The last time it had hiked its PLR was on December 10.

For information visit to: http://www.fixeddepositindia.blogspot.com

Source - Times of india

BoI raises fixed deposit rates by up to 75 basis points

State-owned Bank of India today raised fixed deposit rates by up to 75 basis points on select maturities.

The bank has decided to revise the interest rate ranging from 25 basis points to 75 basis points on various domestic term deposits schemes with effect from March 10, 2011, BoI said in a statement.

For 91-179 days term deposits less than Rs 1 crore, the bank will pay 7(%) per cent interest, up 75 basis points from the existing rate.

At the same time, interest for 270 days to one year term deposits has been raised by 50 basis points to 8(%) per cent while interest rate for fixed deposits with maturity period between 1-2 year has been raised by 25 basis points to 9(%) per cent.

Banks have been raising interest rates following a 0.25 per centage point hike in short-term lending (repo) and borrowing (reverse repo) rates announced by the Reserve Bank in its third quarterly monetary policy review last month.

Source - Economics Times

Corporates cut FD rates as credit flow looks up

A combination of declining bank rates and improving credit lines is prompting many companies to reduce interest rates on public fixed deposit (FD) schemes floated some months ago when money supply was tight.

Fixed deposit schemes launched by companies such as Mahindra & Mahindra, HDFC, ICICI, Tamil Nadu Power Finance, Sidbi and PNB Housing, amongst others, now offer interest rates between 8% and 10%, down 50-100 basis points over the rates offered six months ago.

Corporate fixed deposit schemes became popular with investors for a brief while towards the second half of 2008 and early-2009, as these schemes offered 11-13% returns. Companies found corporate fixed deposits an easy way to raise money (to meet working capital needs) when banks and other institutional lenders suddenly tightened their purse strings late last year. Around 40 companies had launched corporate fixed-deposit schemes during the second half of 2008, each competing with he other to borrow capital from retail investors.

“Those times were different. Getting credit had become very difficult and companies were left with no option but to approach small investors. Things have changed now; the liquidity situation has improved. Banks and other financial services institutions are more amenable to lend money now,” said Haribhakti Group managing CEO Shailesh Haribhakti.

Another reason for reduced pay-out is the fact that reference rates (bank rates) have come down significantly over the past six months. “Most companies link their coupon rates to the rate set by RBI. Rated issuers (companies) dictate terms now because as much as they need funds, investors too need a secure (and comparatively better yielding) asset class to park their money,” said Bajaj Capital senior vice-president Surajit Mishra.

Still, not all issuers have reduced interest rate on their public borrowings. Tata Motors FD scheme — which has collected close to Rs 1,200 crore (since December 1), according to market sources — still offers fixed deposit interest rates between 10% and 12.8% under various options. Likewise, Exim Bank has also kept its FD rates unchanged at 10%. According to experts, whenever companies want to raise bulk deposits, they tend to keep interest rates higher. Corporate FD schemes typically target conventional savers, retirees and pensioners. Upfront cash rebate is one differentiating aspect (from bank FDs) that makes company deposit schemes click among investors.

“Contrary to the trend, a few companies in manufacturing and realty sectors have raised interest rates by 25-50 bps to attract investors,” says Bonanza Portfolio distribution head Rakesh Goyal.

These companies are desperate to raise funds; being financially weak and on the verge of default, they have no other sources to raise money. Such companies approach small investors, offering higher interest rates. They are even ready to hand-out 4-5% as brokerage charges, taking the total cost of borrowing to around 16-17%. Investors should be careful about investing in such companies,” Mr Goyal added.

Source: Economictimes

Mahindra & Mahindra Financial Services invites FD from public

Mahindra & Mahindra Financial Services,a non-banking finance unit of auto major Mahindra & Mahindra, has invited fixed deposits from the public, for the first time after 3 years.

The minimum amount which an investor can invest is Rs 10,000. This is in line with a recent trend where various conglomerates, including the Tatas, have invited the public for fixed deposits, as traditional sources of funds are drying up. The fixed deposits have been rated as FAA+ by CRISIL, which indicates high safety. The yield on a 3-year fixed deposit interest rate is 13.5%. The rates are 11%, 11.5% and 12% for 12 months, 24 months and 36 months respectively.

MMFSL provides Finance for utility vehicles, tractors and cars with a focus on rural areas. It currently has a network of 442 offices and total assets under management of Rs 8,303 crores. It had a net profit of Rs 177 crore in March 2008.

Source: Economictimes