Should you invest in special, short-term FD schemes rolled out by SBI, Bank of Baroda and others?

Consider laddering the fixed deposits by investing in multiple FDs with different maturities. This will help manage interest rate risk and ensure liquidity.

Conservative retail investors who prefer fixed deposits (FDs) as savings instruments of choice now have one more option: 'special-rate' short-term FD schemes that cater to specific investment horizons.

Leading banks like Bank of Baroda (BoB), Indian Bank and State Bank of India (SBI) have extended the special tenure deposit schemes till March 31, 2025, originally introduced in mid-2024, offering higher interest rates.

These specialised FD schemes provide higher interest rates, compared to traditional FDs. They are suitable for risk-averse investors who wish to optimise their returns in the short term.

For instance, Bank of Baroda's BoB Utsav Deposit Scheme comes with a tenure of 400 days, while SBI has launched Amrit Vrishti and Amrit Kalash schemes with maturity periods of 444 days and 400 days, respectively. Additionally, Indian Bank is offering its Ind Supreme term deposit that carries a tenure of 300 days.

Higher interest rates for a limited period 

The BoB Utsav Deposit Scheme offers an interest rate of 7.30 percent per annum for 400 days. Senior citizens earn an additional interest rate of 0.50 percent per annum, at 7.80 percent.

Similarly, SBI’s Amrit Vrishti offers an interest rate of 7.25 percent per annum on a deposit of 444 days, effective from July 15, 2024. Senior citizens earn an additional interest rate of 0.50 percent (7.75 percent per annum) for 444 days.

The interest rates under the special tenure schemes are higher, compared to regular tenure FDs, while comparing a similar term of deposit.

For instance, BoB’s one-year FD offers 6.85 percent per annum, while its 400-day special tenure FD will fetch a higher return of 7.3 percent per annum. Similarly, SBI’s one-year to less than two-year FD offers 6.8 percent per annum, whereas its 444-day Amrit Vrishti scheme yields 7.25 percent per annum, offering higher returns for a shorter tenure.

Why do banks offer these special tenure FDs?

In 2024, India's banking sector saw a notable trend when credit growth outpaced deposit growth, raising concerns over asset-liability mismatches for the central bank. Bank credit grew 11.1 percent in 2024, while deposits grew 9.8 percent year on year (YoY). The Reserve Bank of India (RBI) has been monitoring the situation closely, cautioning banks about the need to maintain a stable deposit base.

"Banks use special tenure FD schemes to balance their asset-liability mismatch, effectively stabilising their balance sheet," says Amol Joshi, Founder of Mumbai-based Plan Rupee Investment Services.

“Offering higher interest rates on specific tenure FDs is a strategy banks use to manage their liquidity needs," notes Adhil Shetty, CEO of BankBazaar.com.

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Who should invest?

Short-term special FDs are a suitable option for conservative investors seeking guaranteed returns over a short tenure. According to financial advisors, risk-averse investors can consider investing in these schemes when interest rates exceed 7 percent.

These FD schemes benefit senior citizens, as they offer higher rates compared to traditional FDs and assured returns. Additionally, individuals seeking to diversify their portfolio while retaining liquidity may also find these schemes appealing.

While investing in these schemes, it's essential to note that certain banks may have restrictions, such as no premature withdrawals, penalty for early withdrawals, or higher minimum deposit requirements, which can impact liquidity and flexibility.

Evaluate your needs carefully before investing 

To maximise your returns, it is crucial to compare the interest rates by various banks for special tenure FD schemes, enabling you to choose the bank offering higher returns.

When investing in special tenure FDs, which are typically denoted in days, convert the tenure to months for easier tracking. Ensure that the maturity period aligns with your financial goals. A slightly higher interest rate (25-50 basis points) may not be worth it if it leads to a liquidity shortage when you need your funds.

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Opt for laddering strategy

To maximise the benefits of the higher interest rates on special tenure FDs, investors should consider locking in their investments now, before potential rate cuts. “If you anticipate a rate drop soon, it's wise to opt for a longer FD tenure to secure the current higher interest rates,” says Shetty.

Consider laddering the FDs by investing in multiple FDs with different maturities. This will help manage interest rate risk and ensure liquidity.

A laddering strategy involves diversifying your bank FD investments across various maturity periods, creating a staggered 'ladder' of maturity dates. This approach provides regular liquidity, allowing you to access funds as needed, while also offering opportunities to reinvest at potentially higher interest rates in the future.

For short-term deployment, one can choose between FDs and liquid funds.

Know the limitations

By investing in FDs, your funds are tied up for the selected tenure, restricting easy access to your money. In the event of an unexpected expense or emergency, withdrawing from these investments may attract penalties or additional costs.

“FDs offer capital protection and slow growth, but they may not be ideal for long-term wealth creation," notes Shetty. After accounting for taxes and inflation, the returns can actually be negative, eroding the value of your investment.

Special and regular FD schemes come with additional limitations, making it essential for depositors to understand the terms and conditions before investing. For instance, the BoB Utsav Deposit scheme offers both callable and non-callable options. With callable options, investors can withdraw their funds prematurely, whereas non-callable schemes do not permit early withdrawals, requiring investors to keep their funds locked in until maturity.