There is a new option for individual investors in bank fixed deposits, which is called non-callable fixed deposits. Sometime ago, the Reserve Bank of India during one of its monetary policy reviews had allowed the option of issuing differential deposits that are non-callable but offer higher interest rates to attract more investors. Axis Bank is the first lender to launch such a product in the market. Investors who want to lock in money in this product need to consider its features closely. Here is a detailed look at the concept, how it works and how investors should make their choices.
Nature of deposits
A non-callable deposit is different from a traditional bank fixed deposit product in terms of liquidity. While a normal fixed deposit allows investors to withdraw money at any point of time — though an early withdrawal can lead to a penalty in the form of lower interest rate — the key point is that the money can be taken out early. But when it comes to non-callable fixed deposits, the investment would be locked in for the entire duration and the amount cannot be withdrawn prematurely. This reduces liquidity of the instrument and, hence, investors need to take this into account when they choose this option for investment.
Higher interest rates
Since there is a restriction on liquidity, investors are compensated through higher interest rates. The key question investors should ask is how much higher is the interest rate being offered, as a small difference in rate over a traditional fixed deposit product might not be very attractive. Every investor should take a look at the extra benefit available and see whether it is worth the sacrifice that they would be making in terms of loss of liquidity. If the interest rate offered is just a fraction higher than what is offered on a normal bank FD, the product might not be attractive enough to get depositors to put their money in it.
Minimum amount
Non-callable fixed deposits are unlikely to be offered to smaller investors, and the minimum limit on deposits that the investor can make would be higher in such a case. For common investors, the minimum amount would be a few thousand rupees. But since the product requires a lot of understanding and also persistency, it is likely that the minimum investment amount would to be fixed at a significantly higher level. For example, the minimum limit for the Axis Bank product is Rs 15 lakh, which would make it out the reach for common investors, who usually start off with a few thousand rupees and then go on increasing it by adding additional amounts.
Duration of product
The time period for such deposits is also a significant element to consider. It can range from one to several years. There is every likelihood that banks would initially offer it for short durations, as they test the market and investor response to the product. In that sense, there might not be a number of choices for investors, which would be restrictive in a way. While this is a good concept that provides an additional choice to investors, it is unlikely to become very popular within a short time, as it has several conditions attached to it, which may make many investors opt for a traditional fixed deposit product.
The writer is a CA and certified financial planner
