The low interest rate period is basically a bad news for the conservative investors. At the same time, it is good news for borrowers. The concept of assured or fixed interest rate is a thing of past (taken for granted). In past, the investors posed their faith in small savings scheme with an assumption to earn relatively higher and assured interest rate. In other words, the interest rates were immune to fluctuations of interest rate cycle. The Small Savings Scheme interest rates remained untouched in past due to populist measures. But with the focus on economic growth, it is imperative to accept the low interest rate period. Therefore, the interest rate is now dynamic for small savings scheme i.e. revised every quarter.
In this post, by conservative investors, I mean the investors who would not like to take any risk with their investments. Trust me the overwhelming majority of investors in India are conservative only. They avoid riskier options like equity investment even though it can generate higher returns compared to conservative options like Fixed Deposits, Small Savings Schemes etc. In India, only 18 million people invest in equity market i.e. just 4.5% of the households (No of households = 400 Mn). In other words, we can safely assume that 382 Million or 95.5% households are conservative investors. Now you can imagine the impact of low interest rate on investments :).
For conservative investors, an incremental return or interest rate of 1% is good enough. The reason being here 1% means approx 10% to 15% incremental return in absolute terms. In last year or so, I received numerous requests from the readers of my blog how they can generate additional returns in a risk-free way during low interest rate period. Another key concern of the investor is that they don’t want to lock-in the money, unlike small savings schemes. Keeping these 2 considerations in mind and based on the reader’s queries, I decided to share a dedicated post on this subject. Let’s check out.
Low Interest Rate Period – Five Tips To Generate Additional Returns
1. Fixed Deposits:
A couple of months back I met one of the acquaintances in the society. He was looking quite worried at that time. His concern was that his fixed deposits were getting matured. He asked me what to do as he booked FD’s at 9% and he was offered an interest rate of 6.5% and for his father’s FD the interest rate is 7% (Senior Citizen). I suggested him to check with other banks. I also suggested exploring Fixed Deposits offered by financial institutions with high CRISIL rating.
By chance, I met this gentleman last week and I asked him about his dilemma that he shared with me a few months back. I was curious to know what he did. He told me that he is anticipating a further drop in interest rates thus he booked fixed deposit with Bajaj Finserv at 8.05% for 5 years. His father got 0.25% additional interest rate as he is senior citizen i.e. 8.30%.
As an investor, additional interest of 1.55% is too good. He did some research before investment i.e. CRISIL rating etc. Moreover, he told that he can access the FD details through customer portal and on maturity, the amount will be automatically credit to his bank account. Normally the senior citizens are concerned about TDS part but TDS will not be deducted on the interest of up to Rs 5,000 p.a. In short, he was happy with his decision.
To summarize, during low interest rate period it is better to opt for fixed deposits with good CRISIL rating to generate additional returns over bank FD’s.
2. Liquid Funds:
In my opinion, Liquid funds are a perfect replacement of Savings Account. Normally, the contingency funds are parked in a savings account. The objective is that money should be liquid. You can withdraw it anytime from the bank through ATM or transfer instantly.
Typically, if you redeem liquid fund units, you will receive the credit maximum by next day morning. The best part is that some of the liquid fund schemes provide instant credit i.e. units can be redeemed on real time basis. It is as good as amount lying in a savings account. The only catch is in case the investor needs money on a holiday or when the market is closed.
The interest earned on a savings account is 4% and some banks do offer 6% but in liquid funds, you can almost generate double returns compared to savings account provided fund selection is good. Therefore, during low interest rate period liquid funds provide a better alternative to savings account deposits/balance.
3. Payments Bank Account:
I shared a dedicated post on Payments Bank Account. Currently, the Airtel Payments Bank Account is offering an interest rate of 7.25%. It is higher than Savings Bank Account and Bank FD’s but lower than option 1 and 2 as discussed in this post. You can deposit up to Rs 1 Lac in Payments Bank Account and earn 7.25% interest. With the launch of other payments bank, the interest rate on deposits will increase due to competition. In low interest rate scenario, it is one of the better options to generate additional returns.
4. Utilize your credit card limit for Investment:
You can liquidate your credit card limit via mobile wallet and can generate incremental returns of up to 8% depending on the investment option. I shared it in detail in my post, How to get short term loan at 0% interest rate. You can utilize this short term loan for investment purpose. The only catch is that you should not take any risk with the loan amount as you need to return the same within very short period.
5. Through Shopping and Offers:
Here I would like to share 2 real life practical examples
(a) Mobile Recharge: Recently, I came to know about a recharge offer from my mobile service provider. On the top up of Rs 490, they are offering a balance of Rs 600. A simple calculation shows that it is an upfront return of 22.44% on the spend (indirect investment) in just one month as my monthly usage is around Rs 500. Therefore, I recharged to meet my requirement for next 1 year. Normally these offers are available during FY end as the telecom companies have to meet their annual targets. Thus on an investment of Rs 4900, I received balance worth Rs 6000 i.e. 22.44% annual return.
(b) Online Purchase: One of the e-commerce portals provide a cash back of Rs 1000 on the purchase of Rs 3000 only on shopping during 1st and 2nd of every month. I always postpone my purchases to 1st and 2nd of the month. In other words, you can receive a whooping return of 33.33% on your essential spend. Most of the wallets and e-commerce companies keep rolling out such offers. The only catch is that you should buy only what you need. In other words, don’t buy just for the sake of availing offers.
Words of Wisdom:
To summarize, during low interest period, it is not only direct investments (Point 1, 2 & 3) but indirect investments (Point 4 & 5) as well can help you generate additional returns. In this post, I only discussed risk-free options suitable for conservative investors. Through an intelligent mix of investment options, you can easily generate an additional return of 1.5% to 2% over and above the FD rate of nationalized banks.
The interest rate may not fall further but they are here to stay for longer period. The demonetization dashed all the hopes of a reversal of interest rate cycle. The reason being, demonetization cooled off inflation. Till the time inflation is under control the low interest rate period will stay. Therefore, conservative investors should always look out for opportunities to generate additional returns.
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