The Hindu Business Line : FD interest rates perking up

IF THE equity market is just not your cup of tea and you prefer spreading your surplus across fixed deposits (FDs), you have reason to cheer. Interest rates are beginning to perk up and not just that on company FDs. True, company FDs have begun to look more attractive as tax benefit is no longer available on the interest earned from bank deposits. But banks have been quick to revise their deposits upwards, making them attractive, once again, for those who do not want to risk their money in fixed deposits.

The good news is that the rates have been raised even for shorter maturities. Interest rates on one-year deposits in some banks are as high as 6.25 per cent. This is higher than the 6 per cent rate offered by companies such as Madras Cements and Wheels India on their deposits.

Senior citizens also get a good deal. For instance, City Union Bank offers 7.50 per cent on one-year deposits for senior citizens, 50 basis points, more than the regular rate. United Bank of India offers a healthy 8 per cent to senior citizens interested in parking funds for 7-10 years. This is comparable to yield on schemes such as, Post Office Monthly Income Scheme and Kisan Vikas Patra.Banks are also marketing their fixed deposits aggressively. HSBC Bank, the latest to revise its interest rate on its FD — SmartMoney account — offers an interest rate of 6 per cent for a 400-day lock-in.

The minimum deposit amount is Rs 25,000. The bank also offers a free savings account to depositors; there is no need to maintain the quarterly minimum balance of Rs 25,000 that a savings account-holder is obliged to.

ICICI Bank offers a credit card against fixed deposit. As it becomes a secured form of credit, the interest on rolling over the outstanding is 0.99 per cent, much lower than the usual 2.95 per cent. It, however, would be a more expensive option compared to overdraft offered against FD.

The freebies and higher interest rates are incentives to invest in bank FDs, which come with a lower risk profile. Besides, with most banks offering overdraft facility against deposits, you can continue to earn a good interest rate on your savings, without worrying about breaking a deposit in times of emergency. SmartMoney allows depositors to withdraw 90 per cent of the deposit amount through the overdraft facility. The interest on the amount withdrawn is 2 per cent more than the deposit rate, which is what most other banks offer.

It, however, charges the bank's prime lending rate if the overdraft limit is over Rs 2 lakh. But if you do not fancy the idea of taking a loan or overdraft against your FD, but are still looking for a better interest rate than your savings account, liquid funds continue to be a good investment option. Liquid funds invest your money in the call-money market and high quality debt instruments, and this ensures a fairly high degree of safety for the principal. The interest you earn on your investment is, however, fluid. But over the past year, liquid funds have delivered returns of 5-6 per cent. This makes it a superior option, given the liquidity it provides.

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