Fixed return products: Higher returns on FDs
With the amendments in Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, bank FDs have become more attractive. Earlier, only liquidation of the bank triggered the insurance liability. DICGC is now required to pay depositors even when any direction, order or scheme is passed such that it prohibits the depositors of the insured bank from accessing their deposits.
The Act now mandates DICGC to pay depositors the insured amount (of up to ₹5 lakh, inclusive of principal and interest) within 90 days of the date of such order or prohibition. Hence for a depositor, this brings all banks — public, private, small finance banks (SFBs) or even urban co-operative banks (except primary co-operative societies) — on par in terms of safety of deposits, for as long as their deposit amounts (aggregate of all accounts, whether savings/current accounts, or recurring/fixed deposits, held in all branches of a bank) do not exceed ₹5 lakh.
Hence, amidst the low interest rates, investors can consider parking their funds in the deposits of SFBs, which typically offer higher returns than other banks. Though their financials have been impacted by Covid outbreak, deposits up to ₹5 lakh can be considered. With rates at a multi-year low now, a one to two-year tenure is ideal as this will give the opportunity to reinvest at better rates later. Locking deposits in longer tenures will mean missing out on higher returns when the rates begin to move up.
Suryoday currently offers 6.5 per cent on deposits with tenures of one-to two years. This is higher than rates of public sector banks that currently offer interest in the range of 4.9 to 5.2 per cent, on similar tenures. Even private banks offer interest of up to 6 per cent only, for such tenures.
Senior citizens earn a higher 0.25 per cent on the deposits. Investors can choose from either the quarterly payout option, or the cumulative payout option (with quarterly compounding). Currently, FDs can only be opened by visiting the bank’s branches. The bank has 555 branches across 13 States and Union Territories. Investors can also dial the toll free number (18002667711) to request for a doorstep banking service.
Suryoday SFB is currently into microfinance (constitutes 68 per cent of its loan book), commercial vehicle financing (8 per cent) and home loans (8 per cent), etc.
While in the recent June quarter its GNPA inched up to 9.5 per cent from 9.4 per cent in March 2021, its provision coverage ratio (PCR) is at a healthy 70.9 per cent. The bank has an outstanding loan book of ₹4,004 crore. Its capital adequacy ratio – Capital to Risk Weighted Assets Ratio (CRAR) is at 52.1 per cent.
Shriram Transport Finance FDs
Another option to perk up returns is deposits offered by higher rated NBFCs. While FDs of NBFCs are not covered by DICGC, for many, their pedigree and long-standing track record speaks for itself. Shriram Transport Finance Company (STFC), whose FDs are rated FAAA (Stable) by CRISIL and MAA+ (Stable) by ICRA, is one such company.
Though the company has never defaulted on its deposits, its financials now indicate some near-to-medium term stress in operations. Hence, investors with an appetite for risk and who seek higher returns can invest in this FD.
At the current juncture, the FD rates of STFC seem better than those offered by most banks and other similar-rated NBFCs. The company offers 6.75 per cent on its two-year deposits. Senior citizens get an additional 0.3 per cent. Other AAA-rated NBFCs offer interest rates up to 6.2 per cent on their two-year deposits.
Investors can choose from monthly, quarterly, half yearly or annual interest payout options or the cumulative option.
Investors who opt for the online route can also choose from special tenure deposits such as 15-month and 30-month deposits. The company offers 6.75 per cent and 7.5 per cent, respectively, on such tenures, same as that offered on its two and three-year deposits, respectively.
As of June 2021, its assets under management were ₹1.19 lakh crore. In June 2021 quarter, its gross Stage-3 assets stood at 8.18 per cent vs 7.06 per cent in the March 2021 quarter. PCR was at 44 per cent of Stage 3 assets. Its 42-year track record in pre-owned CV financing, strong capital and liquidity position offer comfort. The company’s CRAR stood at 23.27 per cent.
Do note that interest on FDs is taxable at one’s applicable slab rates.
Floating rate products: A ride on rate cycles
While interest rates move up and down in cycles, it is not easy for the investor to predict the timing of the moves.Floating rate instruments help one to ride the rate cycle without having to worry about second guessing the central bank’s moves or having to be nimble on one’s feet all the time to lock into the most beneficial deposits. There are two attractive floating rate options today, both backed by sovereign guarantee.
Public Provident Fund
Public Provident Fund (PPF), despite its long tenure of 15 years, is one of the best savings schemes. This is because of its floating rate — interest payable on PPF is revised quarterly by the Centre — and tax friendliness. The interest rate fixed for each quarter applies to the entire balance in your PPF account and not just the investment made in that quarter. The interest on PPF at applicable rates for each quarter gets credited to the account at the end of each financial year and compounds annually.
Over the years, the returns offered on the PPF have predominantly been at a premium to deposit rates across tenures. For the current quarter ending December 2021, the PPF offers an interest of 7.1 per cent. Moreover, the post-tax return of PPF is better under both the old and the new tax regime.
Under the old tax regime, investment in PPF is eligible for tax deduction under Section 80C of the Income Tax Act while interest earned and the maturity amount are also tax-exempt (EEE status). Under the new tax regime, there is no tax break on contribution but the interest accrued and the maturity amount continue to be tax-exempt.
The minimum and the maximum limits of investment in a PPF account per financial year are ₹500 and ₹1.5 lakh, respectively.
A PPF account can be opened in a post office or through any of the public sector banks or select private banks such as Axis Bank and ICICI Bank.
A few banks, such as HDFC Bank, provide the online option to open the PPF account if you maintain a savings bank account with the bank.
Once you open the account, you can either transfer using the net banking option provided by the bank or the post office. Otherwise, an app from India Post Payments Bank (IPPB) enables investors to do online processing of annual minimum/periodical contribution towards the account online instantly.
RBI Floating Rate Bonds
The other floating rate scheme that offers an attractive interest rate of 7.15 per cent currently is the Floating Rate Savings Bond, 2020 (Taxable) – FRSB 2020 (T) with a tenure of seven years. This, however, comes with a periodical pay-out option and thus suits investors who are looking for regular income.
The interest rate on the FRSB (2020) will be reset every six months. The interest will be paid out every six months — on January 1 and July 1 every year.
The half-yearly interest rate reset on the bond is linked to the prevailing rate on the NSC (National Savings Certificate) with a spread of 35 basis points (bps) over the respective NSC rate. Currently, the interest rate on the NSC is 6.8 per cent, and so the rate on the FRSB (2020) bond is at 7.15 per cent. This is one of the best options in the fixed-income segment now and that too, with highest safety net. The interest income, however, from the scheme is taxable and TDS may be deducted on crediting the interest amount to your account.
The minimum investment amount is ₹1,000 and no maximum limit. The investment amount is auto-credited to customer’s bank account on maturity.
Applications for investment in the bond can be given in the branches of nationalised banks such as SBI, Axis Bank and HDFC Bank.
The bonds will be issued in electronic form and credited to the Bond Ledger Account of the investor. A certificate of holding will be issued as proof of subscription. If you have a demat account with a brokerage house having a bank backing, you may also be allowed to buy the instrument online, using your trading account.
Market-linked products: Options with attractive yields
If you are looking to diversify from FDs and want decent returns in today’s low interest rate environment, Target Maturity Funds (TMFs) and listed Non-Convertible Debentures (NCDs) fit the bill. For individuals in the higher tax brackets, TMFs can be their go-to choice.
However, these products require a moderate risk appetite. The market value of your investments in TMFs and listed NCDs are prone to fluctuations. With interest rates expected to go up, you can be exposed to a fall in the market value of your investment (mark-to-market loss). This can translate into an actual loss if you choose to exit prematurely. Here, we give you two choices that offer attractive yields if you hold on till maturity. Staying invested until maturity will also prevent the possibility of capital loss.
Edelweiss Nifty PSU Bond Plus SDL Index Fund – 2026
TMFs are debt funds with a defined maturity that invest passively in the bonds constituting a particular index. All existing TMFs rank high on credit quality and safety as they invest in some combination of AAA-rated corporate bonds and GOI/ state government bonds. If you stay invested until maturity, you get a predictable return. The yield to maturity (YTM) at the time of investment minus the expense ratio indicates your return.
Capital gains on debt funds sold after being held for three years or longer are taxed at 20 per cent with indexation benefit. So, you can adjust the initial investment value for inflation and thereby lower your capital gains for taxation purposes. This is a major attraction.
High-tax bracket individuals (20 per cent and upwards) with a matching investment horizon can consider the Edelweiss Nifty PSU Bond Plus SDL Index Fund – 2026, maturing in April 2026. The scheme invests in AAA- rated PSU bonds and state government bonds. With a 5.73 per cent CAGR return, it is a good alternative on a post-tax basis (see table) to public/leading private bank fixed deposits, which are comparable to the underlying portfolio of the TMF.
Tata Capital Financial Services NCD
NCDs are issued by companies to raise long-term capital and typically offer better returns than FDs. You can invest in them either during the IPO or in the secondary market. If you buy in the secondary market and stay invested until maturity, then the YTM rather than the coupon rate is the correct return metric. The YTM accounts for not just the periodic coupons but also the price at which the bond is bought and redeemed (issue price), to arrive at total return.
The coupon or interest is taxed at your income tax slab rate. Capital gains on NCDs sold after being held for up to one year are considered short-term and taxed at your slab rate. Long-term capital gains are taxed at 10 per cent without indexation.
In the light of past defaults, it is better to go only for AAA-rated NCDs from business houses with a good pedigree. Trading volumes should also be adequate for ease of exit, if needed. With interest rates expected to rise, shorter-maturity NCDs that are relatively less rate-sensitive make more sense if you intend to sell them prematurely.
Based on data from HDFC Securities, the AAA-rated Tata Capital Financial Services NCD (series - 890TCFSL23 - Individual) with a residual maturity of 1.97 years and YTM of 6.28 per cent is a good option. As of October 8, 202,1 the NCD had traded with an average daily volume of 2,637 units over a month.
Given that the interest is taxed at slab rates, NCDs suit those in the lower tax brackets (see table). As the tenure is under two years, one can stay invested till maturity when the NCD is redeemed at face value to avoid possible capital loss as well as to realise the pre-tax YTM of 6.28 per cent.