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Wednesday, June 24, 2015

Add some stability to your portfolio with bank fixed deposits – a guest post

The younger you are, the more should be your allocation to equities. Why? Because the longer you stay invested in equities, the greater is going to be your likely returns. Also, your financial commitments are lower when you are younger. So, you can afford to take more risks.

As you grow older, start a family and care for elderly parents, you will need more stability in your investment portfolio and additional cash flow to support your primary earnings from business or profession.

In this month’s guest post, Nishit argues in favour of bank fixed deposits. The downside to bank FDs is low returns which are taxable. The upside is safety of principal amount and facility of regular cash flows through quarterly interest payments. Using some simple investment strategies, the unexciting bank FD can add stability to your portfolio.


Interest rates are falling. That is being touted as good news for the economy and for borrowers. Lower interest rates mean higher growth and more jobs. More jobs mean more income and more purchasing power. This whole cycle of spending, consumption and growth is likely to be triggered off by the cutting of interest rates by RBI.

RBI has already reduced rates by 75 basis points (i.e. 0.75%), and is further expected to reduce rates by about 1-2% before this cycle is over.

One of the casualties of this rate-cut cycle who goes unlamented is the senior citizen, who depends on fixed deposit (FD) interest for his livelihood. Banks are very quick to cut deposit rates and those FDs which were giving interest of 9.7% have already been reduced to 9%. In fact a study across PSU and Private Banks shows that maximum interest on FD which can be obtained now is 9%.

How does one work around this? To explain the impact, if a senior citizen has Rs 10 lakhs in FD, 9.7% interest gives him Rs 97000 and 9% gives him Rs 90000 per year. How does he make up for this Rs 7000 shortfall?

One way of doing it is locking in FDs for a period of 5 years when the rates are high. 5 years is a sufficient long period for one cycle of rate cuts to play out.

Also, once the rates start being cut, the 2-3 year FDs offer the highest rate of interest. At such times, one can go for such shorter-duration FDs.

The Senior citizen scheme from the Government, which has a 1 year lock in period, still offers 9.3% rate of interest. This rate changes only in April every year. So, one can lock in up to Rs 15 lakhs in this scheme till April ’16.

Next common question is: what about liquidity? What if one needs money urgently then how does one break the Fixed Deposit? A simple option is to break the one giving the least amount of interest. Even this can be circumvented by ensuring and planning the FDs in such a way that one FD matures every 3 months.

To do this, it requires certain amount of planning and the staggering of the FDs. Also, one can plan the FDs in such a way that every month some or the other FD gives interest. Quarterly credit of interest gives the highest returns and by staggering the FDs one can ensure a monthly flow of income while enjoying the higher returns of quarterly Interest.

The protection of capital is a must and only nationalized or top private banks FDs can be considered. This can be spread across 2-3 banks so that the risk of default is minimised.

These are some simple strategies, if followed scrupulously, can give maximum bang for the buck.


(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan. You can reach him at

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About Asset Allocation – a guest post

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