How Rising Bank Fixed Deposit Interest Rates a Challenge for Stock Market, Mutual Fund Investors?

Our economy is one place that loves change. It is quite hard, even for the top-expert economist, to predict what might happen in the near or later future. This is why we have to always stay on the lookout for more opportunities and lesser risks – especially in terms of finances.

If you had a choice of high returns, would you choose to invest in FDs or the stock market? If both were the same, most people would end up choosing FDs because it has no risk at all. Let’s look at what is happening in our economy in 2023.

Why are FD Rates Rising?

In the middle of the Central Bank of India’s (RBI) interest rate hike, several Indian banks have announced increases in fixed deposit (FD) interest rates in recent months. State Bank of India (SBI) recently increased its FD rate by up to 80 basis points (bps), while Canara Bank increased its retail FD rate by up to 135 basis points (bps). Aside from them, HDFC Bank, ICICI Bank, Axis Bank, IndusInd Bank interest rates,, and Kotak Mahindra Bank are among the institutions that have lately upped fixed deposit interest rates. As a result, typical bank FD rates are projected to attract investors who shifted to equities during the stock market’s post-Covid bounce.

Yet, increased bank fixed deposits will not make mutual funds or direct stock investments less appealing. But, in terms of portfolio diversification, it will undoubtedly provide some difficulties for equity investors, as debt mutual funds are projected to regain their luster under the high bank interest rate regime.

According to analysts, in the middle of the RBI’s interest rate frenzy, debt mutual funds could be seen as an appealing asset allocation alternative, as the RBI is likely to boost interest rates again at its next Monetary Policy Committee (MPC) meeting. He urged investors to use high accrual schemes, dynamic tenor schemes, and floating-rate bonds (FRBs), which are projected to outperform other debt products during the high-interest rate regime.

Can Rising FD Rates Affect the Stock Market?

If your FD outperforms inflation, it makes sense for investors. The actual rate of return is the excess return on investment – in this case, an FD – over inflation. If it is positive, you will have something after correcting for inflation, and your money will be worth more. A negative real rate of return indicates that inflation is eroding the real value of your money.

In India, policymakers have raised interest rates due to high inflation. It’s no surprise that some investors grabbed the opportunity to take advantage of the high-interest rates on offer.

While rising interest rates prompted investors to explore FDs, the recent poor performance of equities mutual funds (MF) has also prompted investors to choose FDs. Flexicap funds lost 2.09 percent on average in the fiscal year.

A limited number of investors are transferring money from mutual funds (MF) to corporate fixed-income securities (FDs). Many cautious investors have also migrated from low-interest bank FDs to substantially higher-interest, high-quality corporate FDs. If banks like HDFC give greater rates, most people will find it appealing to put some money into HDFC FDs.

Several investors have switched from bank FDs to corporate FDs in the last six months. Most well-advised MF investors have a long-term perspective and rarely switch to FDs simply because of one year of bad returns.

But this is a wonderful moment to invest in long-term fixed-income securities, don’t go crazy. Put your short-term emergency reserves in a bank FD and some money in company FDs. Laddering helps mitigate reinvestment risk. Most importantly, do not incur credit risk in the hopes of making a lot of money. Investors who seek a couple of percentage points higher risk losing their entire capital.

Laddering entails investing in FDs with varying maturities in order to ensure cash flows at various times in time, such as one, three, and five years. The probability that an investor may be unable to reinvest the interest and principle earned at a rate equivalent to their current rate of return is referred to as reinvestment risk.

Numerous investors have discovered lucrative NCDs (non-convertible debentures) yielding up to 9% interest. Nonetheless, investors must use caution when selecting them. These NCDs hold AA or lower ratings, indicating more credit risk compared to AAA-rated quality FDs. Furthermore, due to the mandatory issue of NCDs in demat format, many investors find it impossible to overcome the operational obstacles of filing for NCDs.

Conservative investors, particularly senior citizens, may not have demat accounts, making digital payments problematic. In some circumstances, the narrow window of public issuance makes arranging finances and completing the process problematic.

If you are a low-income taxpayer, then FDs make sense for you. Because interest is taxed based on the investor’s tax bracket, most high-income earners prefer to invest in debt funds.


Shifts are natural. Also, don’t ever do what the whole crowd is doing; make sure you choose investments that always fit into your financial structure and goal.

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