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What is the right proportion of FDs for your portfolio?

By Finserv MARKETS - Oct 15,2019
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What is the right proportion of FDs for your portfolio?

Fixed deposits (FDs) are making a comeback as they are generating better returns than most stocks and equity mutual funds. As a pall of gloom hangs over the market due to bad news from various quarters such as high unemployment rates, a slump in the auto industry, and a falling GDP among others, FDs have become one of the best investment options in India.

As FDs provide guaranteed returns despite an uncertain economic condition, it is gaining favour among investors again as a safe investment option. Though the RBI has begun reducing the benchmark repo rate since February 2019, there has only been a slight corresponding reduction in fixed deposit interest rates by banks while NBFCs are still offering high returns on investment. For instance, fixed deposits on Finserv MARKETS are still available at up to 8.7%.

Financial institutions are looking for growth in deposits and hence are reluctant to reduce FD interest rates. This is the right time to invest in fixed deposits, but as the saying goes, you shouldn’t be putting all your eggs in one basket. A wise investor must use discretion and must have the right mix and proportion of asset classes in his investment portfolio. Let’s try to figure out the right proportion of a fixed deposit that you must have in your investment portfolio to balance safe investment options with a good return on investment.

Strategizing your FD investment

FDs may be among the best investment options in India but financial planners advise against putting your entire corpus in a single investment instrument. Therefore, asset allocation plays an important role in good financial planning.

Debt allocation

Experts recommend a combination of debt funds and fixed deposits in your portfolio instead of just one among the two. For short-term financial needs, you can invest in Flexi FDs or non-cumulative FDs and for monetary needs expected in 3-5 years, you can invest in cumulative FDs. If you have a long-term investment goal (more than 5 years), you should opt for other safe investment options such as corporate bond funds, PSU debt funds and bank debt funds.

If you are not comfortable investing in debt funds, you can go for long-term fixed deposits. However, good returns on investment shouldn’t be the sole criteria for selecting a financial institution for your FD. There are small finance companies that provide high returns but have low credit ratings as they carry a high risk. It is important to check that the financial institution has good CRISIL and ICRA ratings. FDs available on Finserv MARKETS come with the highest stability and safety of CRISIL FAAA and ICRA MAAA ratings, as well as provide high returns of up to 8.7% for senior citizens.

Take risks in equity, not in debt instruments

Fixed income and debt instruments such as fixed deposits, bonds, government securities and National Savings Certificates (NSCs) are preferred by investors because there is low or no risk of losing your money. If you have a high appetite for risks, you should invest in equities, not in debt instruments. Therefore, it doesn’t make sense to invest in financial companies that lure you with high returns but come with high-risk ratings.

Share of fixed deposits in your investment portfolio

When determining fixed deposit allocation in your portfolio, you should consider your age, risk appetite, tenure and investment goal. Remember a debt instrument such as FD can help you build a corpus that can help you meet emergencies. FDs can be easily broken or withdrawn in case of medical emergencies or meeting other life contingencies.

Age also can be a huge factor in your portfolio distribution because you can take more informed risks when you are younger. The ‘100 minus your age’ rule of thumb says that you can allocate 60% of your portfolio to equities when you are 40 years of age (100-40 = 60).

In that case, your ideal asset allocation should something like this:

  • Equity – 60%
  • Mutual funds – 10%
  • Gold – 10%
  • Fixed deposit – 20%

However, this asset allocation formula may not be ideal in the current market scenario. In that case, you can reduce equity exposure to 40% and invest the surplus 20% in other debt instruments such as corporate bonds and NSC. It is important to align your asset allocation and investments with your financial goals.

A good mix of debt, equities, real estate and gold helps you spread the risk and make a decent return on investment in spite of unfavourable market conditions in any one or two asset classes. FDs may be one of the best investment options in India today but you should always remember and follow the old adage of not putting all your eggs in one basket.

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Bajaj Finserv Direct Limited ("BFDL") is primarily engaged in distribution of financial products and services through its digital platform (“Bajaj Finserv MARKETS”) and inter alia renders services of customer acquisition, providing preliminary credit support activities, fulfilment services and post-acquisition customer services to Banks, NBFCs, HFCs. BFDL is also a registered Corporate Agent (Composite) under valid IRDAI registration number: CA0551 valid till 10-Apr-2024 for solicitation and servicing of Insurance Products. Registered Office: Bajaj Auto Limited Complex, Mumbai – Pune Road, Akurdi, Pune – 411 035 CIN: U65923PN2014PLC150522