In current scenario, money is the biggest player in our lives. For our money’s long term investment, we have Fixed Deposits as a major and most famous product. What IdleBrains wants to bring to your notice is Floating Rate Term Deposit which is other interesting variant of Fixed deposits.
In FRTD (Floating Rate Term Deposit) scheme,the interest rate on deposit moves in tandem with a reference rate of the bank, unlike current fixed deposit schemes where the rate of interest remains same for the complete tenure. The product offers no guarantee on returns as the interest rate shall change as and when the reference rate moves. If the reference rate rises, interest rate will also rise and if reference rate falls so does the interest rate on the deposit.
FRTD is a relatively new product and was introduced in September, 2010 by State Bank of India. It’s a good investment option when the market is about to rise as the bank’s reference rate will rise and hence increasing the profits.
For short term investors, it’s a good chance to book profits according to sudden rise in bank’s base rates.A retail investor has to borrow at floating interest rates while earning fixed interest rate on his investments under Fixed Deposit Schemes. With FRTD scheme, when the base rate of the bank increases, investor earns the increased interest on his investments and hence the investor can lower the mismatch between his liability and assets.
For example, if I borrowed a loan from some bank, then i need to pay interest according to the increased interest rates on the borrowed amount but my fixed deposit in the same bank will be earning profit at a constant rate of interest. But if i have invested using floating rate term deposits, when i am paying the increased interest rate on my borrowed money, i am gaining more profits according to the increased interest rate.
All banks don’t provide the FRTD schemes as it’s hard to manage. Any individual is eligible to open an account. Before opening the account every individual should check about the minimum and maximum amount andperiod of deposit. Interest rate changes and loan related queries should also be clarified in advance too.
Depending upon the tenure, the interest rate increases to lower the gap between itself and the base interest rate. Suppose for 1 year, it’s 50 basis points lower than base rate then for 3 years it may be 25 basis points lower then the base rate and for 5 years it may become same as base rate.
For the persons looking for steady income, it may be a risky option as with the market going down, you will loose the profits. Falling interest rate can adversely impact our motive of profit.
You need to have a constant watch on market if you are going for the FRTD schemes. As we need to understand in which direction the market is going and the effect of other factors on market, it is considered as a complicated option too.
FRTD can surely get better returns against fixed deposit returns but it can get worse too. While you are expecting better returns, you may not even have a nominal return which Fixed Deposits guarantee.
But if you want to book good profit, you have to take the risk, It’s the rule of the money game. We will come back with more investment options. Keep visiting IdleBrains for more on finance. Happy Investing….
Ravi+ - Co-Founder of IdleBrains. Software engineer by profession, a poet at heart and tech writer by passion. Loves sweet music and cricket. Admirer and follower of Sachin Tendulkar. Follows his hobbies as “TheGhost”. Visit the poet here.