Interest rates are clearly on the way down. The State Bank of India has lowered the interest rate on savings bank accounts to 3.5%. Fixed deposit rates are still around 6.25% for most people but are surely headed lower.
This is a reduction of about 25% of what investors were earning on their fixed deposits just a couple of years back. Don’t be surprised if, in about a year or so, most banks are paying 3.5% on savings accounts and 5-5.5% on fixed deposits.
Since individuals park a big chunk of their money in these two types of savings, the fall in interest rates is a problem. Is there a solution? As it happens, there is. There are mutual fund products that fit the bill perfectly.
They not only give you higher returns than these banking products but also get taxed at a lower rate, making the effective return very attractive. The convenience is still not up to the level of a savings account, although it’s pretty close.