Floating Rate Term Deposits – a good investment option

 

Floating Rate Term Deposits – a good investment option

In the changed scenario, an investment decision has become quite tough. When we prepared ourselves   to invest a portion of our money for long term, the options before us seem to be too vague. Unlike the current fixed deposit schemes in which interest rate remains fixed during the tenor, the interest rate in the Floating Rate Term Deposits scheme will move in tandem with a reference rate. When the reference rate will move up the interest rate will also go up and will come down if the reference rate dips.  With this, there will be no need for the depositors to contemplate premature closure of their existing fixed deposits and face penalty. Currently, if any depositor goes for premature closing of his fixed deposit, the depositor has to pay a penalty for the premature withdrawal. Floating rate term deposits are a variant of the fixed deposits offered by banks. The interest rates on offer are linked to the bank’s base interest rate. This is a relatively new product in the country, with the first one having been launched by State Bank of India in September 2010.

 


Keeping your money in Floating Fixed Deposit is a good option when the interest rates are expected to rise. Retail investors, who have taken loans, use these deposits to hedge their interest rate risk. Earlier, retail investors used to borrow at a floating rate and earn interest on their deposits at a fixed rate. Also, during phases of high inflation, such as now, these deposits are a good option, as interest rates are expected to rise.  When I started my Floating Rate FD with SBI during Sept, 2010 the interest rate was 7.50% now my deposit earning 9.5%, when the interest rate goes up accordingly the FFD rate also will go up and vice versa.

http://imads.rediff.com/0/default/empty.gif Steady returns is what investors look for while placing deposits with banks. In a rising interest rate scenario, customers could be benefited due to the likelihood of the base rate getting revised upwards. However, in a falling interest rate scenario, the depositors' returns could be adversely impacted. Falling interest rates are your worst enemy when going for such deposits. One can’t really predict how long it may go, providing no guaranteed returns. This makes it a risky option for people looking at steady earnings. With interest rates changing often, these may not be a great alternative to fixed term deposits. This is especially true for senior citizens, who rely on a fixed deposit’s regular income and stability. These products are also considered complicated in nature. So, to make the most of them, the depositor needs to know in which direction will the interest rates move, so as to not fall short of the fixed term rates.

We are not sure presently which are all banks offering this product, I myself deposited in SBI Floating Rate FD during Sept, 2010, Corporation Bank was also got approval from RBI for launching this deposit scheme. Please check with your bank for more details. My idea here is just to introduce a new deposit scheme.

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