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Bank deposits now look more `interest'ing

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Most banks, both public sector and private, are offering rates not seen at the short end of the maturity spectrum for long. So, if you are looking to reduce your exposure in equity and increase investment in safer options such as term deposits, there couldn't be a better time to do it than now.

Raghuvir Srinivasan

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 short-term 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.

(This article was published in the Business Line print edition dated March 18, 2007)
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