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Should You Invest in Special Short-Term Fixed Deposit Schemes Offered by Banks?

Explore special short-term FD schemes by SBI, BoB & more. Earn higher interest rates, ideal for risk-averse investors & senior citizens. Learn more!

Conservative investors and senior citizens often look for secure investment options that offer stable returns. Recently, leading banks like the State Bank of India (SBI), Bank of Baroda (BoB), and Indian Bank have introduced special short-term Fixed Deposit (FD) schemes that promise higher interest rates for a limited period. These schemes are ideal for risk-averse investors seeking better returns in a short timeframe.

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

What Are Special Short-Term FD Schemes?

Special short-term FD schemes are fixed deposit products tailored for specific tenures, offering higher interest rates compared to traditional FDs. These schemes aim to attract depositors by providing assured returns while helping banks manage liquidity and balance their asset-liability mismatches.

For instance, banks such as SBI, BoB, and Indian Bank have extended these schemes until March 31, 2025. Here's a breakdown of some notable offerings:

  • BoB Utsav Deposit Scheme: Tenure of 400 days, offering an interest rate of 7.30% per annum (7.80% for senior citizens).

  • SBI Amrit Vrishti: Tenure of 444 days, with an interest rate of 7.25% per annum (7.75% for senior citizens).

  • Indian Bank Ind Supreme Term Deposit: Tenure of 300 days, with competitive interest rates.

Why Are Banks Offering These Special Schemes?

In 2024, India’s banking sector faced a situation where credit growth (11.1%) outpaced deposit growth (9.8%) year-on-year. This imbalance raised concerns over asset-liability mismatches, prompting banks to launch these special tenure schemes to attract more deposits. By offering higher interest rates, banks aim to stabilize their balance sheets and meet liquidity requirements.

Amol Joshi, Founder of Plan Rupee Investment Services, explains, “These schemes are an effective tool for banks to manage their liquidity needs and balance their asset-liability mismatches.” Adhil Shetty, CEO of BankBazaar.com, adds, “Higher interest rates are a strategic move by banks to ensure a steady inflow of funds.”

Key Features of Special FD Schemes

  1. Higher Interest Rates: These schemes offer better returns compared to regular FDs of similar tenures. For example:

    • BoB’s one-year FD offers 6.85%, while the 400-day Utsav Deposit Scheme fetches 7.30%.

    • SBI’s one-year to less than two-year FD offers 6.8%, while the 444-day Amrit Vrishti scheme yields 7.25%.

  2. Senior Citizen Benefits: Senior citizens enjoy an additional 0.50% interest rate, making these schemes even more appealing.

  3. Limited Tenure: These schemes are denoted in days (e.g., 400 or 444 days), providing short-term investment options.

  4. Liquidity Restrictions: Some schemes may not allow premature withdrawals or impose penalties for early exits.

Who Should Invest in These Schemes?

Special short-term FD schemes are best suited for:

  • Risk-Averse Investors: Those seeking guaranteed returns with minimal risk.

  • Senior Citizens: Benefiting from higher interest rates and assured returns.

  • Portfolio Diversification: Individuals looking to diversify their investments while retaining liquidity.

Tips to Maximise Returns

  1. Compare Interest Rates: Evaluate offers from different banks to choose the scheme with the highest returns.

  2. Align Tenure with Goals: Convert the tenure from days to months to ensure it aligns with your financial objectives. For example, a 444-day FD translates to approximately 14.8 months.

  3. Use a Laddering Strategy: Diversify investments across multiple FDs with varying maturities. This ensures regular liquidity and allows reinvestment opportunities if interest rates rise in the future.

  4. Secure Current Rates: If you anticipate rate cuts, lock in your investments now to benefit from higher returns.

Limitations to Consider

While these schemes offer higher returns, they come with certain restrictions:

  • Liquidity Issues: Funds are locked in for the selected tenure, and premature withdrawals may attract penalties.

  • Tax Implications: Interest earned on FDs is taxable, which may reduce net returns.

  • Inflation Impact: After accounting for taxes and inflation, the real returns may be lower.

  • Callable vs Non-Callable Options: Some schemes, like the BoB Utsav Deposit, offer callable (premature withdrawal allowed) and non-callable options (no premature withdrawal).

Are Special FD Schemes Worth It?

For conservative investors, these schemes provide an opportunity to earn higher returns without exposure to market risks. However, it is essential to:

  • Understand the terms and conditions.

  • Evaluate your liquidity needs.

  • Consider the tax and inflation impact on returns.

If your financial goals align with the tenure and you prefer capital protection over high-risk investments, special short-term FD schemes could be a worthwhile choice.