Use both short- & long-term corp FDs to gain most from rate hikes

Mumbai: Distributors believe investors should spread their fixed deposits using a mix of short-tenure and long-tenure deposits to make the most of a series of rate hikes expected in the next 12-15 months.

Over the last month, all deposit-taking companies have been slowly increasing their fixed deposit rates as they seek to attract investor money.

Over the last fortnight HDFC, Mahindra Finance, PNB Housing Finance, Sundaram Finance and Shriram Transport Finance have increased their deposit rates by 10-50 basis points.

While this is the third hike in deposit rates for HDFC since February, for others like Mahindra Finance, Sundaram Home Finance, Shriram Transport Finance and LIC Housing Finance, it is the first hike in recent times. After this round of hikes, senior citizens can now earn up to 8.4% from their fixed deposits.
"The RBI is expected to cumulatively hike the repo rate by 200 bps over coming quarters and the interest upcycle is likely to last for the coming 12-18 months," said Murthy Nagarajan, head-fixed income at Tata Mutual Fund.

As inflation rises due to the war between Russia and Ukraine and central banks raise rates, distributors believe investors should spread their tenures over different time periods.

"Given that interest rates are expected to rise further, opting for a mix of short and long tenure deposits is a good decision. It can help earn decent returns on investment (ROI) with minimal risk," said Ankit Gupta, co-founder of Bondsindia.com. Gupta believes investors can allocate about two-thirds of the money to short tenure deposits of 12-18 months and the rest to deposits with tenure of three to five years.

In this scenario where interest rates move up sharply over the next 12 months, investors will get an opportunity to lock in at higher rates on their new deposits. For short tenures, Bajaj Finance pays 5.75% for 12 months, while Shriram Transport Finance pays 6.5% for the same tenure.

Many investors have preferred bank or finance company deposits recently because of their simplicity and visibility of returns. While a deposit earned investors 5-6% in the last year with certainty, many debt mutual funds returned as low as 1-2%, making many prefer fixed deposits.

Financial planners, however, believe it is important that investors should look for the safety of capital and not chase high returns in the fixed deposit space and spread their deposits across 4-5 strong AAA-rated companies.

"Allocate more to companies that have strong promoters and to groups that have a manufacturing business," said Juzer Gabajiwala, director at Ventura Securities. Gabajiwala recommends a higher allocation to deposits of Bajaj Finance, HDFC, ICICI Home Finance, Mahindra Finance and PNB Housing Finance.