Money flows to PO deposits again as bank FD rates fall to below 7%.

Sharp cuts in bank deposit rates in the last one year have prompted investors to sift a portion of their money to traditional products like government bonds and post office time deposits, which offer higher rates. Fixed deposit rates of top banks have fallen by an average 0.5-1 per cent to 6.5-7.1 per cent. In comparison, government bonds and post office deposits of longer durations are fetching about 7.5-7.75 per cent.

With interest rates expected to fall further, investors are looking at options other than bank fixed deposits.

“The ability to earn 1-1.5 per cent higher by investing in post office deposits or GOI bonds with high safety is drawing investors away to these products. Upon maturity of bank deposits many investors reinvest the proceeds in these schemes,” said Rupesh Bhansali, head (distribution), GEPl Capital.

The RBI has cut the repo rate by 110 basis points from 6.5 per cent to 5.4 per cent since January, prompting banks to cut their lending and borrowing rates.

Today, a one-year deposit with SBI fetches 6.5 per cent while a three- or five-year deposits fetch even lower returns at 6.25 per cent. Government bonds with a 7-year tenure offer 7.75 per cent, while a post office time deposit for 5 years fetches 7.7 per cent. A post office time deposit of lower duration of one to three years fetches 6.9 per cent.

Investors can start with as little as Rs 1,000 in a 7.75 per cent GOI Bond; while in a post office time deposit, the minimum amount is Rs 200, with no upper ceiling. Interest income is taxable at the hands of the investors. It works well for investors especially retirees and others whose income is not taxable.

“Traditional post office products and GOI bonds are a good bet for investors looking for fixed returns with safety and whose income is not subject to tax or are in the marginal tax bracket,” said Jitendra Solanki, CFP, JS Financial Advisors.

Solanki points out that many investors do not understand the difference between different debt funds and shy away from them especially in turbulent times.

A choppy stock market, where investors have not made returns in equity in the last one year, is driving investors to safe and assured return products.