Is there an investment opportunity in PSP Projects shares?

Bank deposits are for conservative investors as they offer fixed interest rates depending on the tenure. However, when the economy is in a slowdown phase the return from bank deposits could be very low especially after factoring in inflation. Having said that bank deposits are one of the safest tools to park your money for emergency funds. Several small finance banks are giving a high-interest rate of 6.5% to 6% on fixed deposits of a tenure of one to two years.

Data from Bankbazaar.com shows Jana Small Finance Bank, Suryoday Small Finance Bank and Equitas Small Finance Bank are offering FD rates of 6.5-6.35% % for one to two -years tenure. State Bank of India, the largest bank in terms of assets,  is offering a 5 % interest rate on one to two years FDs.

Why do small banks offer higher interest rates?: Big banks have huge liquidity and are less inclined to get more deposits, but the same is not applicable to small finance banks. “These small finance banks comparatively offer higher interest on FDs than major banks to attract more customers. These banks are paying around 6 to 6.5% for a 1-2-year term deposit. These rates are higher at least by 1% as compared to commercial banks. So, when they pay higher interest to public on their deposit naturally the loans are also marked accordingly,” said Adhil Shetty, CEO, BankBazaar.com

Should you invest? Small finance banks are directly regulated by the RBI since they have been categorised as scheduled banks just like PSUs and other private sector banks by the central bank. “While investing, one must remember that returns are always linked with the risk associated with the investment. With higher returns come higher risks. While one can invest in FDs of small finance banks, the exposure should be restricted to Rs 5 lakh as this amount is insured under the deposit insurance program of DICGC.”

While FDs can be a part of your investment, they cannot be enough. “To be able to get high returns that can act as a hedge against inflation, it is essential that you look beyond banks and FDs at market-linked products like mutual funds. With a little attention and prudence, they can provide good returns over the long run,” said Shetty.