If bank fixed deposit rates continue to fall, investors might move their funds to dynamic bond funds and fixed deposits of high-rated corporates and non-banking finance companies (NBFCs), financial planners said. According to them, many investors in metros are having a slightly higher risk appetite and invest in these instruments.
While some banks have already cut their fixed deposit rates, others are expected to do so after the Reserve Bank of India's (RBI) monetary policy statement on May 3. This is probably the last chance for investors to lock-in some funds in bank fixed deposits at a nine per cent annual return.
"For this month, investors should invest in bank fixed deposits, as this is one last opportunity of getting blocked in a good one for a year or two. Parallelly, investors should also look at investing in dynamic bond funds," said Sumeet Vaid, founder and CEO, Freedom Financial Planners.
Dynamic bond funds invest the corpus in fixed income instruments such as government bonds and corporate bonds. These funds are actively managed, due to which the fund manager has the flexibility to change the duration of the portfolio, based on his view on interest rate movements. The returns of most of these dynamic bond funds have been over 10 per cent in the last one year.
"It makes great sense for investors to invest in dynamic bond funds. But they should be comfortable with the fund manager and one should also figure out that there is sufficient amount of flexibility and liquidity in the assets managed under the fund," said Dhawal Dalal, executive vice-president and head of fixed income at DSP BlackRock Investment Managers.
The other investment option being considered is highly-rated fixed deposits offered by companies and NBFCs. The high rating given by rating agencies is important, given the risk involved. "In metros, we are seeing investors willing to take that extra risk and shift to debt funds and fixed deposits offered by corporates/NBFCs, considering bank fixed deposit rates are falling," said Suresh Sadagopan, founder of Ladder7 Financial Advisories, which specialises in comprehensive financial planning. According to Sadagopan, with bank fixed deposit rates expected to fall further, more investors may opt for these debt funds and corporate/NBFC fixed deposits.
The Street is expecting RBI may cut the repo rate by a further 25 basis points (bps) on May 3, which would result in most banks cutting their deposit rates.
Earlier this month, Punjab National Bank, India's third-largest lender, slashed fixed deposit rates up to 200 bps on various maturities. This was followed by Bank of Baroda and Oriental Bank of Commerce.