Bank FD longterm or shortterm

POSTED BY PK ON December 12, 2011 3:44 am COMMENTS (5)

I have a lump sum amount getting matured from a bank FD. I invested this amount when the FD rate was around 7.25%. I dint remove it in between though the FD rates went up in recent times, because it was in FD from a longer time and removing it was actually a loss. I want to re-invest the money in bank FD again. I do have different streams for mutual funds and I don’t want to use this money for mutual funds. Also, I don’t need this money in near future. My question is, for how much period I should invest it. Now the FD rates are around 9.75 (for 500 days) and 9.25 for 5 yrs and above. Last time, I got only 7.25% for many years. So I want to be careful this time. If I invest for only 500 days, though I get 9.75%, after 500 days from now, the interest rates might come down and I will need to re-invest for less percentage. At the same time if I think of investing for more than 5 yrs, I do get 9.25%. But what are the chances that the interest rates goes beyond 9.25%. Even if it goes up, what are chances that it goes up beyond 10%?. I am just trying to think the best possible duration. As per my knowledge, the interest rates will go down from here. Even if it goes up, it won’t go up more than another 0.5%. Are there strong chances that the interest can go up to 10.5 or 11% in the next 5 years? If i invest for 5 years, I will get a fixed 9.25% even if the interest rate goes to 7.5% in the next couple of years. So I am trying to make a balanced decision. Could you please help me with this.

5 replies on this article “Bank FD longterm or shortterm”

  1. Dear Raju, in case of a RD, the coupon rate i.e. the rate at the time of opening the Rd account ‘ll remain fix for the whole duration of your RD.



  2. raju says:

    Hi Codered/Ashal,

    I have a query regarding Recurring Deposits.

    If we start a RD now with 9.5% with a lock in of 5/10 years,Does same interest rate applicable for 5/10 years(complete tenure) or will it change as per changing interest rates?


  3. CodeRed says:

    Dear PK, lock in your fixed deposit for the maximum duration possible. The term should be preferably 10 years or 120 months since the interest rates are at its peak. As you are aware, interest rates are cyclical in nature. If you do not lock your fixed deposit for the longest term, you may have to face the decline of interest rates in future.

  4. Syed Sagheer says:

    Just lockin what ever rate you get for the maximum duration, this seems to be near the peak of interest rate cycle

  5. Dear PK, Interest rates are almost near to their peak. Even if from here the banks increase the rates, it ‘ll be for short term duration say 1Y to 3Y time frame. The maximum time frame you may lock in to a bank FD is 10Y. In my view you should lock that up for current 9.25% for the 10Y period as not many banks are offering that high interest for such long term.

    I’m not commenting on the taxability of the interest earned on bank FDs. Which ‘ll bring down the over all return from the Bank FDs.

    Interestingly To use such high interest rates in our favor, I ‘ll ask you to not only opt for bank FDs but also you should start investing in 10Y bank RDs. The similar rates are being offered on RDs too.



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