Banks to give 3.5% p.a. returns on savings accounts

Starting 1 April, we all will get 3.5% per annum interest for funds that are idle in our savings bank accounts. Earlier banks were mnadated to give 3.5% per annum returns on the lowest balance between the 10th and the end of any month.

Assume that in month, one had deposited a large sum on on the 15th of a month and keep it there for the rest of the month. One would tend to think it will get some interest because the money sat in your account for 15 days, one does not. Because the minimum balance in your account from the 10th to the 15th is zero, that is the amount picked up to calculate the interest.

Banks will have to give interest on a daily closing basis.

ICICI Bank cuts deposit rates

ICICI Bank has cut its deposit rates by upto 50 bps (0.5% p.a) on with effect from Nov 12.

It has cut rate on the 390 day deposits to 8.5%. The bank also cut rate on 590 day deposits to 8.75% and discontinued the 890-day special deposit scheme.

At the same time it has increased the interest rate for the one-year to four-year tenure, which was earlier running at about 6.5-6.7% to 8%.

Many other banks have also cut the deposit rates for the 1 year period. While the CRR has been increased by the RBI, the banks are taking a route to reduce the deposit rates instead of the increasing the lending rates.

Banks cut home loan interest rates and Term deposits

THE country’s largest and second largest lenders — State Bank of India and ICICI Bank — have brought down interest rates on various loans including new housing loans. SBI has also lowered interest rates on some term deposits. The move comes a few days after the finance minister asked banks to bring down interest rates.

The proposed rates are under a festival offer applicable for all new loans sanctioned on or after Monday and are valid up to end-December for SBI.

As part of the festival offer, SBI has reduced interest rates on all new home loans, car loans, twowheeler loans and personal loans. Home loans are now cheaper by 0.50% to 1% depending on loan maturities and amount of loan. SBI also gives discount if the salary account is with the bank and further discount if a higher margin is available. For home loans up to Rs 20 lakh with a tenor of up to five years, SBI has cut rates from 10.75% to 10%, for loans with tenor between five and 15 years rates are cut from 11.25% to 10.25%. For tenors from 15 to 20 years the rate is reduced from 11.25% to 10.5%. For loans over Rs 20 lakh, rate cuts are 25 basis points lesser on comparable tenors.

ICICI cuts floating home loan rates

ICICI Bank has also cut interest rates marginally by 25-50 basis points on home, car and personal loans. This is a part of the festive offer by the bank. On the home loan front, the rate cut is only for floating loans. The bank has, however, not bought down its interest rates for deposits.

Rates of SBI’s new car and two-wheeler loans have been reduced by 1% depending on the amount and maturity of the loan. New car loans are now available at 11% to 12%.

Similarly, personal loans are now cheaper by 0.50% to 1%. In addition to the above, the bank is offering 50% concession in processing charges on all the personal segment loans.

Source : Economic Times of India

Comparsion of Bank FD, Debt Mutual Fund and FMP

Now that you have an idea of the Debt fund and FMP, here is a small article on comparing the various instruments and trying to identify which one is the right one for you.

Bank FD
1. Ideal for those in low income tax bracket or no income tax bracket.
2. Ideal for those who want to take no risk at all i.e. who consider that depositing at SBI or ICICI is safer to give than L&T (AAA rated company) through a mutual fund.
3. Ideal for those who are not conversant with the concept of mutual fund and do not want to understand what a debt Mutual fund.
4. Ideal for those who deposit fr a period of 5 year to get the Sec 80C income tax benefit (Indian Income tax rules allow bank deposits for 5 years and above to be treated as an investment for the purpose getting income tax rebate).
5. Ideal for those who do want liquidity but want to be able to get back the principal without any loss.

FMP
1. Ideal for those who think that the interest rates have peaked out for the near future or nearing the peak and want to lock on the yield that one will get for a long period of time. They believe that interest rates will start falling from now on.
2. Ideal for those who do not want liquidity and can wait till the maturity period of the FMP.
3. Ideal for those in the high income tax bracket but want an instrument close to that of a bank deposit.
4. Ideal for investors who are atleast looking at a period of more than 1 year though there is still some benefit for investors investing in FMPs of maturity of less than 1 year but not as much as those investing for more than 1 year.

Debt Mutual
1. Ideal for those who believe in Systematic Investment plan and are looking really long periods of time for their returns so that the good times and bad times get averaged out.
2. Ideal for those who are sure of the time period of their investment
3. Ideal for those who think that the interest rates are peaked out or nearing the peak and want to get high returns by timing the market where they believe that the interest rates will fall fast enough for them to get the capital gains (see my blog on Effect of interest rates on Debt Mutual Fund
4. Ideal for those in an interest rate regime where the interest rates are seen to fall in the future.

So which one should you invest in ??

My take is that one will have to ensure that the portfolio of debt is continuously monitored based on the dynamics of the market and move the funds accordingly.

Right now, I would urge each of you to lock your funds in FMPs of 24-36 months maturity periods.

Here are a few FMPs that are open as of now
1. JM FMF- Sr V- Qtrly 5 - RP (G) from JM Mutual Fund
2. Lotus India FMP-1 month and 3 Series (extended till July 31st)

As the saying goes "Do not put all the eggs in one basket" and have a debt portfolio that best represents you in the current scenario.