High bank deposit rates lure mutual fund investors to FDs

With banks raising deposit rates to meet fund crunch, a number of customers are returning to fixed deposit (FD) schemes. Many people who invest in mutual funds (MFs) have started moving their investments to FDs, which are giving more returns than MFs.

Shweta Sharma, an employee at a fintech firm, said she used to invest in MFs but looking at the returns there she transferred some of her investment to FDs.

"I redeemed my MFs and shifted to 7 percent FD rates with HDFC Bank because I don't see MFs giving the same returns as FDs for at least the next two years," she said.

Rishit Sheth, a customer service executive, recently booked an FD with ICICI Bank saying that high rates and easy accessibility to details and services made him invest in FDs with the bank.

“It is simpler to open and close an FD and withdraw funds compared to MFs. Also, I prefer FDs as they are a safer option for short investment terms compared to MFs,” Sheth said.

Following the Reserve Bank of India’s (RBI) recent 35 basis point hike, banks have increased deposit rates along with lending rates, making FDs more attractive for customers, say experts.

"Banks have majorly hiked rates to bring more customers under their ambit. Traditional investors who have been safely investing in FDs will increase their investments whereas there is a chance that new-age investors would park funds in FDs for a short term," a financial advisor with a bankers’ association said.

Deposit rate hikes, easy withdrawal

Major public and private sector banks alongside some small finance banks (SFB) have aggressively hiked FD rates for short-term deposits.

For deposits under Rs 2 crore for 15 to 18 months, the State Bank of India provides 7.75 percent and 6.25 percent interest rate to senior citizens and other customers respectively. ICICI Bank and HDFC Bank each offer 7.50 percent and 7 percent to the same category of customers, respectively.

On the other hand, the same set of customers with AU SFB can get interest rates of 7.98 to 7.75 percent respectively for the same period. And with Equitas SFB, they can avail 7.7 and 7.5 percent interest rates whereas Jana SFB provides 7.95 percent to 7 percent returns.

Experts said the number of customers shifting from MFs to FDs is on a rise not only due to more returns and easy accessibility to other services and their funds but also because they have to pay less withdrawal fees.

Shashank Vaidya, a finance expert with SV Associates said, "In uncertain times like today, people are majorly looking for short-term investments.
Also, people who wish to withdraw their funds from FDs can easily do it on their mobile phones by paying less withdrawal fee of around 0.25 to 0.75 percent compared to MFs where they have to pay 1 to 3 percent of exit load fee."

Experts also pointed out that people have been traditionally confident and comfortable with FDs and with the possibility of high returns, they are rushing to park their funds in FDs.

"In the last 6-7 months, yields on MFs have been restricted to around 6-6.5 percent. This works as an add-on reason for people to shift to FDs, which are giving a minimum of 6.5 to 7 percent returns," Vaidya said.

A trend in the making?

Experts have predicted that the RBI in its next Monetary Policy Committee meeting in February 2023 is likely to hike the repo rate by 25 bps.

They said after rate hikes, banks also raise interest rates for different products and hence, there are chances of customers shifting their investments.

Does this mean there will be a rush of customers to park funds in FDs if RBI raises the policy rate in February?

Experts don’t see it happening.

MFs have been a risky but higher yielding investment tool, they said, adding, the rush for FDs will mostly last for a very short period.

“Traditionally, FD rate hikes have led to an influx of customers. But looking at the market conditions in the coming months, there are chances that banks will work around their interest rates, maybe hiking for some time and then reducing it to meet the market conditions which would eventually lead to a drop in customer numbers," the financial advisor quoted above said.

Banks say...

Uttam Tibrewal, Executive Director, AU Small Finance Bank said that the Bank has witnessed an uptick of over 50 percent in the daily average of FD bookings since the rate change in December.

"We particularly see a higher proportion of senior citizens opting for FDs post the rate change and expect to encounter constant growth in FD business especially considering people’s inclination towards safer investment options," Tibrewal said.

Rathish R, Senior Vice President and Country Head - Deposits, Fee Income & Business Banking, Federal Bank said:  "Portion of the customers have been moving their deposits to buckets with higher rates and customers' perspectives were also altered by the equities market volatility, and more people now base a portion of their portfolio on term deposits than they did previously."

Rathish added that the higher rates available with FDs now will attract more customers than other modes of investments.