Let us explain why it is important to look at yields and not interest rates. Most banks tend to compound interest rates every quarter. So, let us say you deposit Rs 1,00,000 at 8% per annum and the bank compounds the interest every quarter. Let us assume you deposited the amount on Jan 1, 2019. So, for the first quarter ending March 31, 2019 your interest roughly would be Rs 2,000. So for the next quarter ending June 30, 2019, you would get interest on Rs 1,02,000 and not on Rs 1,00,000.
In short, it is better if interest is compounded every quarter and not every year. Some company Fds compound interest every year and not every quarter, while there are institutions that even compound interest rates every month. Let us take a look at 4 Fds with high yields.
If you invest in the fixed deposits of Mahindra Finance, your yield can go as high as 9.65 per cent on a 40 month deposit. On a 33-month deposit the yield is as high as 9.40 per cent.
This is for the cumulative scheme only. So, if you invest Rs 5,000, after 40 months you get Rs 6,608, fetching a yield of as much as 9.65 per cent.
The deposits from Mahindra and Mahindra are relatively safe and hence investors need not worry too much. In fact, the deposits are rated as AAA by the rating agencies. As we mentioned earlier, the yields on the deposits are very good at the moment.
The Fds from Shriram Transport Finance Company also offer a very high yield. In fact, the 5 year deposits which offer an interest rate of 8.88 per cent with monthly rests, give you a yield of a huge 11.13 per cent. This is under the cumulative scheme only.
For a 48-month deposit the interest rate offered is 8.65 per cent, while the yield is 10.29 per cent. The one thing that we wish to state is the fixed deposits of companies are not secure deposits and hence there could be an element of risk that there could be as far as these deposits are concerned. Therefore, one must go for deposits that are strong and well rated.
Jana Small Finance Bank was one of the banks that was granted license a few years ago, to operate as a small finance bank. The bank offers extremely attractive interest rates.
On a regular FD the interest rate offered by the bank is 8.25 per cent on a 3 year to 5 year deposit, taking the yield on the same to as much as 10.09 per cent on the 5 year tenure. This is not bad at all, given the interest rates offered at the moment.
As far as safety is concerned we are living in a dynamic environment and no author can guarantee safety for any FD. Investors are advised to do their own research before investing.
In this deposit, the deposit holders are offered an interest rate of 8.75 per cent for the 2-3 year deposit. The annualized yield here works to slightly above 9 per cent. Senior citizens are offered interest rates, where yields can go as high as 9.58 per cent.
It is good to ensure before you invest in Fixed Deposits that you check the yields and not interest rates. This is because ultimately yields are important and not interest rates.