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Thursday, June 9, 2011

Floating rate term deposits- New flavour in the market

One after another, banks are coming with Floating Rate Term Deposits (FRD) schemes to mobilize funds.
Unlike traditional FDs, interest rate for this scheme is not fixed but change with the bank's base rate.
This is beneficial for investors when interest rates are going up but on the other side its losing bait when reverse happens i.e. interest rates going down.
Presently this product is being offered for the tenure of 1, 3 and 5 years.
One should only go for FRD when he is very sure that interest rates shall go up in future else he should continue with traditional FD's or other fixed income products.

This is beneficial for those who have taken loans at floating rate. if they have some money to deposit they might opt for this product using it as a hedge against the change in interest rates.
Suppose Mr. Ram has taken a home loan of ` 5 million and he has ` 2 million at his disposal, He might invest this money in FRDs so that whenever there is interest rate hike, interest on his deposit shall also increase and protect him from rising interest rates to some extent.


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