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Banks Fixed deposit Interest rates over the past years have been declining, making the situation difficult for people who are dependent on interest income. The other problem is the banks as they don’t seem to be doing well, and with both private and public banks there is the question of trust. It raises questions like ‘Why the interest rates are falling’, ‘why banks are not doing well’, and ‘are there any alternatives to bank fixed deposits’?

Falling Interest Rates of Fixed Deposit

Over the last few years, the interest rate has been on the downward swing. While a low-interest rate regime helps borrowers, the investors, especially retirees or those investors who rely on fixed income to meet their monthly household expenses, often find it tough. Take the current scenario, where a drop-in lending rate is good news for home loan buyers, a decline in bank fixed deposit (FD) rates is a cause of worry.

What can be the reinvestment risk due to falling interest rates?

So interest rates might be coming down over the long term, it is important to keep re-investment risk to the minimum. For Example: If an investor invests Rs 1 cr. into a 18 year bond @6.5% and holds it till maturity, his corpus grows to Rs 3.1 crore, whereas if the same investor invests @6.5% and reinvests the proceeds every 3 years at the then prevailing interest rates his corpus would become Rs 2.4 crores. in 18 yrs (ROI ~4.7%) assuming interest rates fall by 0.2% every year.

The image below shows how wealth is eroded due to falling interest rates:

Reinvestment risk in Fixed Rate Investments

Reinvestment risk in Fixed Rate Investments

Why are Interest Rates Falling in India?

It seems that surplus bank liquidity and low-interest rates are here to stay. Over the last few years, RBI has been following an accommodative monetary path, adding liquidity and reducing policy rates. Some reasons for falling interest rates were
● Inflation was moderating, (at least on paper), so it gave elbow room for RBI to slash the repo rates
● Demonetization provided sumptuous low-cost CASA deposits, fund supply exceeded the demand
● Low-interest rates encourage Investment, which is the key focus area of both, the RBI and government, so to encourage investment, which will help for more employment, since full employability is the major thrust areas of any government at least based on convention, there is hue and cry from ruling front, industry bodies to reduce rates.

Alternatives to Fixed Deposit

Many of the conservative investors choose Bank Fixed deposits as they think it is a safe investment option. While there is no doubt that Bank Fixed Deposits come with the highest safety, the biggest disadvantage about them is Tax. Interest on Fixed Deposit is taxable as per your income slab, so if you happen to be in the highest tax bracket you pay up to 30.6% tax on the interest income. So the post-tax yield of a 9% fixed deposit comes down to 6.3%.

For long-term, we have traditional options like Public Provident Fund (PPF) amongst others:

● Public Provident Fund (PPF), Tax-Free Bonds, which are tax-free options. But provide unattractive returns.
● Bank Recurring Deposits are taxable and interest is falling down as the economy gets nurtured with growing demand, investments & profitability.
● Fixed Maturity Plans (FMP), Debt Mutual Funds which are taxed on maturity or withdrawal but you can use indexation benefit

Debt Mutual Funds: A debt mutual fund is an active mutual fund, which invests money in government securities, bonds, money market instruments and corporate deposits. However, they are vulnerable to depreciation and appreciation. Features of Debt Mutual Funds are;
· High Safety: They invest in fixed income instruments like bank CDs and company bonds
· Liquidity: You can withdraw anytime
· No TDS (Tax Deducted at Source)
· Stock Market: Not affected by stock market movements

Reliance Nivesh Lakshya Fund- A smart investor’s alternative to Fixed Deposits

There is a new fund offer that’s currently going on till 2nd July, Reliance Nivesh Lakshya Fund by Reliance Mutual Fund which intends to Secure the prevailing interest rate for next 25-30 years! The fund seeks to generate optimal returns consistent with moderate levels of risk without compromising on liquidity (can withdraw at any time). This income may be complemented by the capital appreciation of the portfolio

Nivesh in Hindi means Investment and Lakshya mean Goal. All individuals have long-term goals and would ideally want to have a certain corpus to meet those goals. Be it tension-free Retirement, Child’s Education, Marriage of children, or leaving an estate for their children / grandchildren. As the name suggests Reliance Nivesh Lakshya Fund seems to be an interesting proposition for individuals to invest in Gsecs for locking in good interest rates for 25-30 years through government securities

· Parents and Grandparents, where you can Create a legacy for the child/ grandchild
· High Net worth Individuals,
· Retirees.

Investments predominantly in long-dated G-Secs (25-30-year securities) at 8.13% GSecs 2045 current yield is 8%. Government bonds and securities are issued by the Government of India to raise funds (borrowings) and these come in varying tenures right from 14 days (treasury bill) to 30 years (G-secs). Key features of the fund are

1. Investment horizon up to 25-30 years
2. No Lock-in (Can withdraw anytime)
3. Tax-efficient (Indexation benefit after 3 years)
4. Regular withdrawal possible
You can find details about the Fund here

Importance of Fixed Instruments for Indian Investors:

How important it is to invest in fixed income investments

How important it is to invest in fixed income investments

As per current the above data from KANTAR IMRB, Almost all the affluent respondents find it important to invest a portion of their wealth in Long term fixed income instruments:

Fixed Income investments

98% have invested in bank FDs, which, learnt from above, is not the best option. Hence, an 8% interest rate by Nivesh Lakshya for next 25-30 years is a great option.
Know more here: here

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