Due to the increase in demand for FD schemes, a nation’s economy becomes better able to cope with this change. On the other hand, a rise in interest rates is likely to dampen consumption because of higher borrowing costs. Let’s take a closer look at the current low-interest rate, analyze the effect of the low-interest rate on investments and savings, and get an idea of what needs to be done to stay protected or obtain benefits from the current situation.
Why are interest rates falling?
Recently, FD interest rates have been falling steadily. Interest Rates have been cut due to fragile economic conditions and rate cuts by central banks around the world to simulate the economy. Because of those conditions, excess liquidity makes access to funds more affordable. This trend has been developing since the demonetization of currency in 2016.
What is the best investment option?
Investors and savers are indeed seeing considerable drops in their returns and income, which is a result of falling FD interest rates. But there are also a few options available, such as bonds, fixed income mutual funds, and deposits that might give advantages in this situation.
Listed below are some of the best investment options
Government bonds are bonds issued by the government. Bonds can be purchased through EFTs, mutual funds, or directly. Falling FD interest rates can benefit you as an investor of these bonds. If you want to invest for the long term, this investment option might be right for you.
Funds with high-yield credit risk
A credit risk fund is an aggressive debt fund where 65% of the portfolio is invest in funds with low credit ratings. This type of fund generates high returns as a result. With these funds, investors can decide how much of their investment portfolio to allocate to the segments they wish to be base on their risk appetite for higher returns.
Fixed Maturity Plan
A mutual fund scheme called a fixed maturity plan is a closed-ended and time-bound scheme that invests the corpus in bonds and fixed income papers. The tenure of a fixed maturity plan may range from a few months to a few years, depending on the offer. This scheme has generally been design to lock in FD interest rates at investment time. As a result, the investor is protect from a drop in income if interest rates fall.
Sweep into fixed deposits
Some banks have fixed deposit schemes that include sweeps. A fixed deposit is a deposit in which you may invest part of your savings to earn interest at a higher rate to help you grow your savings. If you lock in your investment for a more extend period, you will be able to get a better return. Many banks offer the ability to access these funds in case of an emergency.
Ultra-short-term funds are medium to short-term funds that you can hold for six months to two years. Investing in these funds may allow you to earn a slightly higher return on your investment. This will allow you to maintain liquidity at the same time.
Investments and savings affected by falling interest rates
The declining interest rates result in a reduction in investment yields and incomes. At the moment, the FD interest rates are falling across all banks. Due to the drop in interest rates, even the investment options often consider safe, like savings bank accounts, monthly saving schemes, and bonds, can also be negatively affected.
Investors are concerned about a possible fall in interest rates on fixed-income investments. However, mutual funds can position themselves in a way that can benefit from falling interest rates. As a result, now the FD interest rates have reach such low levels, you may want to consider these alternate investment instruments.