Worried About Falling Fixed Deposit Interest Rates? There Are Solutions!

The rate of interest on investments is one of the strongest indicators of economic activity. They directly affect the consumption of people and can also impact the day-to-day life of general people. The cut in the rate of interest has positively impacted the borrowers, but the lenders, savers, and investors have negatively impacted.
The falling rate of interest makes borrowing easier. In other words, we can say that cost of funds or loans becomes comparatively cheaper. This increases the number of people who avail of auto loans, home loans, and various other loans that help to fund large or small credit base purchases like cars, homes, etc.

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This increases the demand for such products helps to improve the economy of the country. Inversely, the rise in the rate of interest dampens consumption because of higher borrowing costs. However, the savers get benefits in such scenarios because they get an attractive rate of interest on their deposits and savings.

Let us take a closer look into the currently falling rate of interest, analyze the impact of the same on investments and savings and get to know what should be done for staying protected or get benefit from the current situation.

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Why Are the Rates of Interest Falling?

The interest rates are falling constantly in the last three to four years. The primary reason for the cut in interest rates is fragile economic conditions and rate cuts by central banks across the world for simulating the economy. Such conditions lead to excess liquidity that makes access to the funds more affordable. This trend is being noticed since the demonetization that took place in the year 2016.

The decline in interest rates has flattened lately, but due to COVID–19, it is accelerating. The pandemic has forced the central banks of the world to lower the interest rates to stimulate the economy. Resultantly, many countries are even facing zero to a negative rate of interest.

Impact of Falling Rates of Interest on Investments and Savings

Falling rates of interest consecutively drop the investment yields and income. Currently, the FD interest rates of all banks are falling. The investment options that are considered safe like savings bank accounts, and bonds are also getting affected negatively because of the drop in interest rates.

How to Stay Protected and Get Benefit from Investments in Current Scenario?

Even though the investors and savors are seeing a considerable drop in return and income which are a result of falling rates of interest, there are as well few options available as bonds fixed income mutual funds, and deposits that can give benefits in this situation.

  • Government Bonds or GILTS: The bonds that are issued by the government are known as government bonds. You can invest in these bonds through EFTs, mutual funds, or directly. As an investor of these bonds, you can get benefits from a falling rate of interest. However, this investment option is ideal for you if you want to invest for the long term.
  • High Yield Credit Risk Funds: Credit risk funds are a type of aggressive debt funds wherein 65% of the portfolio is invested in low credit funds. Resultantly, they create high returns. As an investor of these funds, you can allocate a suitable portion of your investment portfolio in the segments as per your risk appetite to get benefits from a higher yield.
  • Medium to Long-Term Bond Funds: If you invest in medium to slight long-term deposits or bonds, you can keep your investment away from falling rates.
  • Fixed Maturity Plan (FMP): A mutual fund scheme that is close-ended and time-bound that invests its corpus in bonds and fixed income papers is known as a fixed maturity plan or FMP. The tenure of a fixed maturity plan may vary from months to a few years based on the offering. This scheme generally locks into prevailing rates of interest and hence helps the investors to guard against a drop of income because of the falling rate of interest.
  • Sweep In Fixed Deposits: Some banks provide sweep in fixed deposit schemes. These FDs help you to convert your savings into fixed deposits for earning a higher rate of interest. Locking in the investment for a longer period may help to get a better return. Many banks provide the flexibility to access these funds in case of an emergency.
  • Roll Down Maturity Fund:A open-ended maturity fund that is similar to FMP wherein the investments are held to maturity. It provides benefits for a specific duration of holding.
  • Ultra-Short-Term Funds: The medium to short-term funds that you can hold for six months to two years are known as ultra-short-term funds. As an investor of these funds, you can earn a slightly higher return at the same time you can maintain liquidity.
  • Sovereign Gold Bonds (SGB): The government issues gold bonds and they reflect underlying gold price and an additional 2.50% per year. Despite being the tenure of the gold bond being eight years, early redemption or encashment of these bonds is allowed after completion of the fifth year from the issuance date upon coupon payment dates.  
You may like to Read: SBI Interest Rates on Fixed Deposits

The Final Words!

Most investors worry about falling interest rates on investments of fixed income, however, mutual funds can position themselves to provide benefits from falling rates of interest. So, in the current times when FDs are providing low rates of interest, you can opt for these alternate investment instruments.

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