Bank deposits now look more `interest'ing

Are you a conservative investor who has been put off by the gut-wrenching volatility in the
stock market in the last few weeks? Are you considering a temporary rejig of your portfolio to
reduce exposure to equity and increase investment in safer options such as debt, including
term deposits? If so, there couldn't be a better time than now to do it.
A big tussle has broken out in the market amongst major banks, public sector and private, to
garner short-term deposits, leading to the kind of rates not seen at the short end of the
maturity spectrum for a long time now.
Attractive short-term interest rates

Rates range between 8.25 per cent to as high as 9.5 per cent for short-term deposits with a
one-year or lower tenor (see graphic). Deposits by senior citizens fetch a premium of 0.25-1
percentage points over the prevailing general rate.
These attractive rates open up a few possibilities for those willing to reshuffle their portfolios
and ride out the market volatility.
Depending on your risk profile, you could pull out partially from stocks and invest the funds in
a short-term bank deposit. For instance, Oriental Bank of Commerce's 300-day deposit that
offers 9.5 per cent is an excellent option that combines safety with decent returns, though it
may not be comparable to what could be had in stocks.
If you are a passive investor you could opt for the cumulative option; if you are among the
more active types, you could opt for the fixed deposit option with monthly interest payments
which could be re-invested either in stocks or in systematic investment plans (SIP) of mutual
funds.

This way, you can get the best of both worlds safety of the principal through the deposit
and incremental returns through investment in SIPs that are ideal in volatile stock market
conditions. The basic idea here is to capitalise on the extremely attractive short-term rates on
offer and to diversify your portfolio.
For those of you already locked into long-term deposits at considerably lower rates of interest,
it may even make sense to break the deposits and look at re-investing the money in a shortterm deposit now. Of course, such a decision should be a function of how long the existing
long-term deposit has been in place and the penalty that your bank/financial
institution/company would levy for foreclosure. By shifting now (assuming that the arithmetic
is in your favour, of course) it will be possible for you to exploit a further surge in interest
rates if it were to occur in the next one year.
With your short-term deposit maturing in the next 12-18 months, you will be in a position to
reinvest the same funds at a higher rate then. Of course, to do this you should be in a position
to judge the possible trend in interest rate movements over the near-to-medium term.
Going by current indications it seems unlikely that rates will drop in the next year; they are
likely to either stay where they are now or move up further.
In fact, the latter appears a distinct possibility now given the rapid economic expansion and
the corporate sector's investment plans that are bound to push rates upwards; there is the
spectre of inflation too and its effect on monetary policy.
While choosing the best option amongst all the banks now, you would do well to note the
following issues:
Some banks have a lock-in for the entire term of the deposit. Foreclosure would mean you
will forfeit interest for the entire tenure.
So, if you anticipate a need for funds before the term ends, you may be better off choosing a
bank that does not have such a condition and there are many of them. Some, such as ICICI
Bank and HDFC Bank, permit partial pre-mature withdrawal with a penalty.
Most of the attractive offers close by March 31 with some such as Canara Bank open till May
31, and others just calling it a "limited period" offer. So decide and act quickly to take
advantage of these rates.
The minimum deposit amount ranges from Rs 100 (City Union Bank) to Rs 25,000 in the
case of UCO Bank and Punjab National Bank. But in most cases it is an affordable Rs 10,000.
There are some banks, such as Canara Bank, that offer only a cumulative deposit option. This
will right away make it unattractive for a senior citizen depending on a monthly inflow of
interest income.
Finally, if you are someone who likes to shop around for the best deal, you may want to look
at banks that throw in additional features, such as a free ATM card, Internet banking and so
on, along with the deposit.
The Web sites of most, if not all, banks that are in the market now have all the details you will
need to make a decision.