About a week back, I received a PR email from IDBI Bank announcing the launch of their Floating Rate Term Deposit scheme. Thought I’d look it up and give you a quick review (a side effect being the evaluation of this scheme for it’s suitability in my ere portfolio).
- To begin with, if things such as a 364-Day Treasury Bill, average yield, interest rate outlook, etc. don’t really make much sense to you, then it’s a good idea to stay away from this product. This investment has a lot of underlying technicality and is suitable for you if and only if you understand all of that. I’m really glad that IDBI Bank states this upfront in the product literature. To quote — “FRTDs are ideally suited for the financially literate investor, who is not averse to taking a call on the directionality of future interest rates/inflation.”
If you’re still reading, I’ll assume that you’re a pretty savvy investor. So, I’m going to highlight some of the nuances that aren’t readily inferred from a casual read of the product literature.
- The minimum term is 1-year and the minimum lock-in period is also 1-year. That’s a disadvantage because given the current market scenario, you’d definitely want to have as much financial flexibility as you can. You don’t get that when premature withdrawals aren’t allowed for a year.
- The base interest rate is reset each quarter but the mark-up (what you get over and above the base interest rate) is only reset once every year. While, the base interest rate is pegged to the 364-Day Treasury Bill, the mark-up seems to be an internally calculated number. So, while you can have your personal opinions about the T-Bill rate movement, you don’t have even that choice on the mark-up. I think the mark-up would be adjusted to keep the total interest rate competitive in general to what’s available from other Banks.
- I couldn’t determine what would happen if, for example, you open a new FRTD on, say today, 03-Sep-2012. Would your interest rate be reset at the next fixed quarterly reset point of 01-Oct-2012 or at the point when your FRTD crosses a quarter (on 02-Dec-2012). I’m guessing it’d be the former but it’d be better to clarify with the Bank.
- Personally speaking, I won’t be taking this up for my ere portfolio. Vis-Ã -vis fixed deposits, I’m currently doing much better elsewhere and with a monthly payout (the FRTD offers a quarterly payout and the other thing I’m not sure about the product is whether the interest accumulated is compulsorily paid out each quarter).
Here’s some additional information from the mailer —
The product is likely to appeal to the retail investors who borrow at floating rates (say, for home loans) but invest at a fixed rate, and are consequently exposed to high interest rate risk. FRTDs ensure that their loans and deposits move in tandem and would help to partially immunize their asset-liability portfolio from such risks.
Investment in FRTDs is also beneficial when the interest rates are expected to rise as it enables the investors to take advantage of periodic increase in the market rates. In a rising interest rate scenario, the customers generally go in for short term deposits and keep rebooking them as and when interest rates move up. FRTD would help do away with this cumbersome process.
- I contest the first argument because say when home loan rates go down why would you want your deposit rates to also go down in tandem? You’d always want to earn as high as possible on your deposits no?
- I contest the second argument because there’s no published logic for calculating the mark-up.
That said, do you think this product has a place in your portfolio?
I’d love to hear your thoughts.
Our interest rates are sticky on the way up. By the time the rates are revised, other products will catch up. With that and lock in period in mind, will it be of any use.
Yeah. I don’t see a specific benefit in opting for this product. More headache than helpful?
the more complex they make, the more i avoid such products.