While many expect the interest rates to see an up-cycle soon, a few feel the recent pause in the RBI’s policy rate cuts is temporary and that more cuts are warranted.
Keeping an eye on the direction of market interest rates would be relevant, especially while deciding on investing in deposits.
Bajaj Finance has launched a systematic deposit plan (SDP) which, apart from creating a monthly savings habit, also captures changes in the market interest-rate scenario in your deposit portfolio. Here, we explain how the product works and whether you should go for it.
What is it?
The SDP essentially allows a person to make regular investments, by chipping in small amounts every month — a minimum of ₹5,000 each month. These monthly investments are treated as separate deposits with tenures of 12-60 months. Investors can opt for the number of deposits, ranging from six to 48.
For instance, if an investor opts for six deposits with a 12-month tenure and starts now (January 2020), she will get six amounts maturing through January to June 2021.
Since each monthly instalment is treated as a separate deposit, the interest rate applicable to each deposit will be the rate prevailing on the date of every monthly deposit. The SDP only offers cumulative interest, ie, the interest shall be paid at the time of maturity of each deposit.
In effect, this creates a laddering effect, where the investor purchases multiple fixed deposits with different maturity dates although the tenure of each FD is the same.
This is different from a traditional RD, where the tenure is fixed and the amounts invested every month earn a fixed interest rate and only for the remaining period of the tenure.
Rates
Currently, Bajaj Finance offers interest rates of 7.6-8.1 per cent for (cumulative) deposits ranging 12-60 months. Existing customers and senior citizens get an additional interest rate of 0.1 per cent and 0.25 per cent, respectively.
The above rates have been in force from December 7, 2019. Prior to this, the NBFC had revised its FD rates on September 3, 2019. Bajaj Finance has the highest credit rating (FAAA by CRISIL and MAAA by ICRA) among NBFCs for its fixed deposits (applies to the SDP as well).
While the same rates do apply for the SDP, investors need to note that any subsequent change in interest rates henceforth will alter the returns on monthly instalments of deposits made after the change.
In comparison, banks (public and private) currently offer 5.5-7.8 per cent per annum, across tenures, on their FDs (same rates apply for RDs as well), while small finance banks offer 7-9 per cent.
While the SDP stands out against a traditional RD, in terms of the flexibility in interest rates investors do need to note that some banks also offer flexi-RDs.
Apart from allowing you to step up the monthly instalments (only in multiples of your base instalment), flexi-RDs also pay a different interest rate on the stepped up amount. The rate applicable for an FD with a similar tenure (remaining tenure of the RD) would apply on the stepped up amount, while the core amount will fetch you interest at the original rates.
Charges and liquidity
In a traditional RD, banks generally charge a penalty — in the form of lowered interest rate — in the event of a delay in or non-payment of an instalment.
No such penalty applies in the case of the SDP. Delaying a month’s SDP instalment only pushes your maturity date for that instalment further. You also have the flexibility to stop investing or restart after a gap with a new ECS (electronic clearing sefvice) mandate.
Akin to a regular FD, premature withdrawals are also possible with your SDP, subject to RBI guidelines.
According to the guidelines, you can withdraw your deposits after a minimum period of three months since investment. However, if the withdrawal is before six months of investment, you will lose out on the interest entirely. For withdrawals after six months, a penalty of 2 per cent is deducted from the applicable interest rate for such tenure.
If you need money for emergencies but wish to keep your SDP intact, you can do so by opting for the loan against deposit scheme of Bajaj Finance.
Should you go for it?
This product may make sense in a rising interest-rate scenario, if the company revises its interest rate at regular intervals. Successive instalments will be locked into higher rates. However, if you want to maximise the interest earned, deciding both the number of systematic deposits as also the tenure of the instalments before hand may be difficult.
While the two recent rate cycles have ranged three to four years, prior cycles have been as long as seven years and as short as two years.
In a falling interest-rate scenario, successive instalments will earn less if the rates are revised at regular intervals. In such cases, locking into a one-time deposit or an RD for a fixed interest rate may be worth more than systematically investing at lower rates.
For those who have a steady cash inflow which you wish to keep reinvested, Bajaj Finance’s SDP could be a suitable option.
Otherwise, this product is suitable for those who cannot keep a regular watch on interest rates in the market and the rates offered by different entities.
About Bajaj Finance
Bajaj Finance is an NBFC that lends to consumer, rural, SME, mortgage and commercial segments. It has a wide presence across 956 urban and 1,041 rural locations. Its assets under management were at ₹1.35-lakh crore as on September 30, 2019, with 39 per cent comprising consumer loans. Gross NPAs as on that date stood at 1.61 per cent, and capital adequacy at 19.68 per cent.