Should you invest in floating rate fixed deposits amid rising interest rates?

What is floating rate FD?

Ms. Nehal Mota, Co-founder & CEO – Finovate said, “Floating rate deposits are like variable rate bonds. The interest rate on the deposit is not fixed but is linked to a benchmark T-bill yield. For example, IDBI Floating Rate The deposits offer a 50 bps spread above the 91-day Treasury bill yield. With the 91-day yield at 5.6%, the 50 bps spread takes the interest rate on deposits to 6.1%. Senior citizens earn an additional 50 bps or 6.6% However, this base rate is reset every quarter based on the 91-day T-Bill yield.”

Is it a good time for a floating rate deposit?

Ms. Nehal Mota, Co-Founder & CEO – Finovate said, “Floating rate deposits are good as depositors are not at a loss when interest rates are rising. However, there are 3 risks.

• Just as the yield increases with rising interest rates, it also decreases with falling rates. If the 91-day T-Bill yield declines, you earn less.

• This product works best when rates are rising. However, the RBI has already hiked the repo rates by 225 basis points through 2022.

• Going forward, the RBI may be inclined to slow down rate hikes or maintain status quo to ensure that GDP growth is not impacted.”

He further added that “Investors can allocate around 20% of FD outlay to floating rate FDs to diversify their FD portfolio. Anything more than this is not advisable at the present time.”

What should be the investment approach to invest in floating rate FD?

Prashant Joshi, Managing Director & Head – Consumer Banking Group, DBS Bank India said, “The return on investment for floating rate FDs is linked to a reference rate, such as the Reserve Bank of India’s repo rate or treasury bill yield. Generally short-term deposits of up to two years are eligible.Considering the current scenario where RBI has announced a rate hike from May 2022, there could be further increase in interest rates in the near term.However Under the current interest rate regime, retail investors will be best helped by traditional FDs. For example, DBS Fixed Deposits address higher yield requirements with 7.25% for regular customers (7.75% for senior citizens). Traditional FDs offer guaranteed returns that are not linked to market volatility, making them a safer option.”

Nitin Rao, head of products and offerings, Epsilon Money Mart, said, “Investing in FDs during rising rates makes sense as it offers attractive investment opportunities. However, the floating rate FD will follow the interest rate scenario. Currently, we are in a rising interest rate regime which makes floating rate FDs very attractive but once we enter a lower interest rate regime these FDs will lose their sheen. Floating rate FDs can be considered if they have a short to medium term vision of 2-3 years and can take advantage of rising interest rates. Ultimately, the investment decision depends on the client’s needs, risk appetite and taxation, should always be discussed with your financial advisor before investing.”

Neeraj Bora, Founder, Surmount Business Advisors Pvt Ltd, said, “Fixed deposits are generally meant for small savings and liquid investment instruments. Raising interest rates is again a matter of monetary and credit demand and supply. The rising trend for 3-5 year FDs may not make much difference. An investor should neither increase the allocation of FDs in the overall investment portfolio due to increased rates nor go for floating rates as these are again temporary and should aim for a minimum horizon of 3-4 years. “

Nidhi Manchanda, Certified Financial Planner, Head of Training, Research and Development, Fintu said, “Since we are in a rising interest rate scenario, and it is unlikely that there will be a significant drop in interest rates in the near future, there are no investment opportunities Floating Rate Fixed Deposits. In fact, there are high chances of seeing some more moderate rate hikes in the coming quarters. Thus, one can invest in floating rate FDs, which will fetch relatively higher returns in the coming quarters. is offering relatively higher interest rates along with interest rates. Having said that, please note that the increase in repo rate is yet to be fully reflected in FD rates of all banks.”

He further claimed that “It is also suggested not to opt for floating rate FDs with very long tenures. This is because, in the long run, interest rates are likely to come down from these high levels. Hence it is suggested that you can opt for floating rate FDs for a maximum tenure of 2 years. A longer investment tenure can expose an investor to the risk of a reduction in the interest rate. Hence, it is prudent to invest in long term fixed rate FDs when interest rates have peaked to lock in a higher interest rate for a longer period.”

The views and recommendations given above are those of individual analysts or broking companies and not of Mint.