Which FD is better to invest in fixed or floating rate? Who will get more profit and why?

Fixed Deposits are second most preferred across the country after Gold. Due to the low interest rates on FDs from the past few years, the trend of people was decreasing towards it. In the coming times, investors should be safe on floating rate FDs Will get more profit with. Let’s check which FD is better to invest in fixed or floating rate?

What are fixed deposits? Which FD is better?

Most of the people in the country prefer to invest in such options, where their hard earned money is completely safe and they also get decent returns in the given period. In such a situation, the thought of investing money in fixed deposits comes first in their mind.

In this, the interest earned on the savings account of any bank in the fixed period gives more profit and the money is also safe. If you are also planning to invest money in bank or post office fixed deposits, then let us tell you that FDs are also of two types. There is no change in the interest rates during the tenure of investment in FD. Such fixed deposits are called fixed rate FDs.

On the other hand, the interest rates of fixed deposits linked to the policy rates of the Reserve Bank of India keep on changing. Such fixed deposits are called floating rate FDs. Recently, floating rate FDs came into the limelight when the RBI increased the repo rate and many public and private banks also increased the interest rates of fixed deposits.

How is the future of floating rate FDs Fixed deposits are the second most preferred choice across the country after gold. However, due to the low interest rates on FDs for the last few years, the trend of people was decreasing towards it, but now due to the increase in interest rates, once again people are moving towards it.

By increasing the interest rates on deposits of banks, it is clear that in the coming times, investors will get more profit with safety on floating rate FD. Change interest rates on deposits Whenever RBI changes key rates, then loan rates too Change happens. At the same time, it has a minor effect on deposit rates.

The rate at which RBI gives loans to banks is called repo rate. Repo rate is the main interest rate in the Indian economy. Whenever economic activities have to be encouraged, then RBI cuts the repo rate so that banks have enough cash to lend. At the same time, whenever the rate of inflation goes beyond the fixed limit of RBI and becomes a cause of concern, then the repo rate is increased.

In simple words, with the change in the repo rate, the loan rates change faster than the deposit rates. For what reasons there is an increase in deposit rates, most banks want to keep the loan rate high and the deposit rate as low as possible. This increases the net interest margin of the banks.

At the same time, the deposit rates also change due to the credit deposit ratio. If this ratio is less then banks can give more and more loans. At the same time, they become indifferent about deposits. In such a situation, some banks can keep the rates low on loans and deposits.

On the other hand, if a bank has given more loans linked to the repo rate, then there is a higher expectation of increase in deposit rates due to increase in key rates. Also read – ‘Government is giving loan up to 5 lakh on Aadhar card’, you also got such a message, be careful what is the condition of inflation at present, the rate of inflation remains above the RBI’s fixed limit of 6 percent.

For this year, the central bank has projected the inflation rate to be 6 to 7 percent. In the last three months, the RBI has increased the repo rate by 1.4 percent in three times to control inflation. With this the repo rate has reached 5.4%. After this, most of the banks increased the interest rates on loans as well as deposits.

The cash deposit ratio has also come down to 72 per cent as compared to March 2019. Why will banks increase deposit rates Banks want to register growth in their loan book with a fall in CDR. At the same time, banks are hoping that there will be no decline in the demand for loans.

In such a competitive environment, it would not be wrong to expect that most of the banks will increase the loan rates along with the deposit rates. According to an RBI report released in March 2022, 61 per cent of loans of private banks and 33 per cent of public sector banks are linked to the repo rate.

In such a situation, it can be expected that private sector banks will increase the deposit rates more.

Floating or fixed rate

Which FD is floating rate at present in view of the increase in interest rates by better banks FDs will prove to be more profitable. However, this benefit will be available only as long as the banks are increasing the rates. As soon as the banks start cutting it, you will also start making losses.

In contrast, on fixed rate FDs, banks fix interest rates in advance. You get profits only on the basis of the interest rate fixed on the maturity of the FD. So, no matter how much interest rates increase between the maturity period, you will not get any benefit from it.

Not all banks have provided the option of floating rate FDs yet.

What is the big advantage of floating rate FD?

The first advantage is that with the increase in interest rates, you will get more profit. On the other hand, this increased profit can help you a lot in dealing with the rapidly rising inflation. If the expectations are considered true, then RBI will increase the policy rates again to control inflation. It is believed that by the end of this year, the repo rate will cross 6 percent. In such a situation, banks will also increase the deposit rates. So, for some time now, you are looking forward to getting higher returns on investment in floating rate FDs.

Conclusion

So which FD is better? Well, it is depending on the tenure of the FD and RBI’s guidelines. If it turns to be in your favor, then you can make more money on your investment. It can go against you as well. You should only be worried if you have put your money in FD for longer than 2 years. Otherwise, it won’t affect you much in the shorter period.

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2 thoughts on “Which FD is better to invest in fixed or floating rate? Who will get more profit and why?”

  1. If FD rates doesn’t even beat inflation rate and the liquidly is very less. Is it still worth the hassle .

    Reply

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