Short-term deposits have many options

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The recent changes made to small savings interest rates have thrown up a number of choices for investors, especially when it comes to investments for a short period of one or two years. Investors need to look closely at various choices before them. It is vital because they need to make the right decision, especially considering the fact that deposits or investments for short-time period is something that most people would have a need for.

Here is a look at some of the choices available and the risk element that comes along with them:

Post office time deposits

There has been a big change as far as the time deposits offered by post office are concerned. Earlier, the one and the two-year deposits had one of the highest rates among similar options with both of them earning 8.4 per cent annum. This has now dropped to 7.1 per cent for the one-year time deposit and 7.2 per cent for the two-year time period. This has affected the attractiveness of the deposits because this is far lower than what the investor will experience with other options that are present in the market. This will put the post office deposits far down in terms of the choice for investors.

Bank fixed deposits

There will have to be a careful look at the public sector bank space. There are several options offered by state-owned banks which look attractive to investor. It is more likely that the offers of smaller banks are more attractive, not the ones by biggies such as State Bank of India or Bank of Baroda or Punjab National Bank. This is because the smaller banks need to fight for deposits and one of the ways in which they can attract deposits is through the route of ‘offering a slightly higher interest rate’. There might not be much difference between various banks, but even a small bit can prove to be an added advantage for investors. In addition, there has to be a look at whether there are some time brackets wherein a few banks have a higher rate of interest. This happens as banks need money for that time period and are hence willing to give a higher rate for this purpose.

Private sector banks

The best interest rates that one will see is likely to be present from one or two private sector players, especially the new banks as they need to attract money to get their business growing. This is an opportunity for investors, but they need to consider the risk at present and if they are going to be disturbed by some negative news then they are better off selecting a slightly lower rate with some other bank.

However, it is not necessary that the investor would have to sacrifice return because there are several well-established private banks that offer good rates on their deposits. One must especially look out for special time period deposits which are offers for a particular time period wherein the rate goes up higher than what a similar time maturity deposit would earn.

This would be the way in which the investor is able to get a better return and looking continuously at the manner in which the banks are changing their rates and the trend here would be very useful. Ultimately at the end of the day, the investor should end up earning a higher rate of return.

(The writer is a chartered accountant and a certified financial planner)

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