Investors are usually attracted to fixed deposits. This is because this investment tool offers guaranteed returns and is considered safe. However, if the fixed deposit interest rate is steadily declining at times like now, a lot of confusion and worry may arise among the investors. In such a state of confusion, there are certain options that an investor may avail in order to protect their investments.

Before we take a look at those options, it is important to understand the root cause of the falling fixed deposit interest rate.

Why are the interest rates on fixed deposit falling?

The falling rate of interest has been a trend in the last few years. This usually indicates a fragile economy. In the last 3 to 4 years, due to the fall in the economy all over the world, the rates of interest on fixed deposits have also been declining. Banks all over the world are cutting down the rates of interest in order to stimulate the economy. While this may have been effective for a while, due to covid 19 the world economy has become more fragile than ever. Before the pandemic, the curve had been somewhat flattened, but the onslaught of covid 19 has accelerated the falling rate of interests all over the world. In certain countries, the rate of interest has become zero to even negative. In India, this trend has been evident in our economy ever since the 2016 demonetization. 

The solutions to falling fixed deposit interest rates

Even though the investors and the savers had to take a blow because of the falling interest rates on fixed deposits, there are certain options they might opt for in order to protect their investment. This might be a good time for investors to look at other options so that not only your investment stays protected, but you are also able to extract benefits from it.

Here are options that we believe might be effective as a solution to falling fixed deposit interest rates.

Government Bonds or Gilts

These are issued by the government. If you invest in government bonds, you will be able to protect investment and even incur benefits from a falling interest rate. Nonetheless, these government bonds are mostly suitable for long term investors. 

High Yield Credit Risk Funds

These are Debt funds that generally invest in corporate bonds or commercial papers. These debt funds lend 65% of their portfolio money to low rated companies in exchange for high interest rates. These companies are required to pay higher interest rates in order to make up for their low rating and credibility. This results in potential risk for the investor. According to your ability to take risks as an investor, you may allocate a suitable part of your portfolio funds to yield higher benefits. 

Medium to Long Term Bond Funds

Investing in medium to long-term bonds might be an effective way to protect your investment from the falling interest rates. As an investor, you will be able to keep getting benefits from your investors if you opt for this option. 

Fixed Maturity Plan

A fixed maturity plan is a closed-end debt fund, which comes with a limited or fixed scope of investment. Only when asset management companies make new fund offers or NFO, an individual may invest in such schemes. If you are the kind of investor who can bear frequent NAV fluctuations, you should definitely invest in fixed maturity plans. It certainly guarantees higher returns than fixed deposit rates.

Sweep In Fixed Deposits

The “sweep-in” account will transfer your excess cash from your savings account to a higher interest-earning option at the end of each business day. Many banks provide this sweep in facility to help you get higher and better interests. As an investor, if you invest long term, you may get better benefits from it. Some of the banks will give flexible access to your sweep in facility during an emergency.

Roll Down Maturity Fund

Roll down maturity funds are quite similar to fixed maturity plans. It is a way of bond trading where the bond’s yield falls as its maturity approaches.

Ultra- Short-Term Funds

Ultra short-term funds, much like medium to long term bonds, will let an investor for 6 months to a two-year long term. Through these short-term funds, an investor may acquire slightly higher interests and can maintain liquidity, as well.

Sovereign Gold Bonds

Sovereign gold bonds are issued by the government where the current underlying price of the gold is taken into account. In addition, 2.50% is also added at the end of each year. The usual tenure for gold bonds is 8 years. However, investors can take out the money after the completion of the 5th year since the date of issue.

These are some of the ways in which you may continue to get the same or higher interest even when there is a steady decline of interest rate on fixed deposits. Depending on the flexibility of the fund and your risk taking capability, compare your options, check fixed deposit eligibility and start investing.