Diversify beyond bank fixed deposits

Invest in a mix of small savings products, debt funds with quality portfolios to counter declining rates

In September 2016, the State Bank of India (SBI) one-year fixed deposit (FD) rate stood at 7.15 per cent. After the latest revision on May 12, 2020, it has plummeted to 5.50 per cent. In the wake of the 40-basis-point rate cut by the central bank, which has brought the repo rate to 4 per cent, banks may slash their FD rates further.

Within the banking space, park a part of your money with small finance banks (SFBS). “The highest FD rates offered by some of the SFBS are at least 200-300 basis points (bps) higher than the highest FD slab rates offered by public- and bigger privatesector banks,” says Naveen Kukreja, chief executive officer and cofounder, Paisabazaar.com.

FDS opened with SFBS are covered under the deposit insurance pro - gramme offered by the Deposit Insurance and Credit Guarantee Corporation, up to ~5 lakh per depositor per scheduled bank. However, strike a balance between higher return and safety. Diversify your FDS across one solid public-sector bank, one quality private-sector bank, and one SFB in the proportion of 40:40:20.

In the small savings space, several products still offer good returns, but you will have to forgo liquidity. The Public Provident Fund (PPF) offers 7.1 per cent tax-free return. “Senior Citizens Savings Scheme (SCSS) and Pradhan Mantri Vaya Vandana Yojana (PMVVY) are excellent for the elderly,” says Suresh Sadagopan, certified financial planner and founder, Ladder 7 Financial Advisory. SCSS offers 7.4 per cent return (taxable). The PMVVY will offer 7.40 per cent per annum (taxable) in FY 2020-21.

Those with a girl child aged less than 10 can start the Sukanya Samriddhi Account (SSA), which offers 7.6 per cent (tax-free on maturity). Another good option is the 7.75 per cent GOI Bond (taxable).

Investors may also turn to debt funds, which offer liquidity and favourable tax treatment if held for more than three years. The safest option is overnight funds, which invest in oneday, mostly government papers. Next, you may opt for liquid funds that invest in papers with up to 91-day maturity. Further up the maturity curve are shorter-duration funds with up to one-year average maturity.

“Many shorter-duration schemes have, in recent times, rejigged their portfolios towards high- quality papers,” says Sadagopan. Investors with some risk appetite may go for funds with a modified duration of two-three years. “If you invest in them now and rates fall further, you will get a return kicker,” says Arun Kumar, head of research, Fundsindia.com.

Another product that is gaining traction s the Bharat Bond Exchange Traded Fund (or fund-of-fund). “It does not carry credit risk because it invests in AAA PSU bonds. It is liquid and you can eliminate duration risk by investing for the entire tenure,” says Radhika Gupta, chief executive officer, Edelweiss Mutual Fund. Finally, you may also consider banking and PSU funds that invest in government papers of up to three-year maturity.