Bangalore:  The State Bank of India hiked deposit rates recently. This throws a spanner into an investor‘s calculations because long term deposit rates have so far tended to be lower than short term interest rates. Some investors are confused as where and how to invest and make a profit from this development. Preeti Kulkarni of ET Bureau reports on the different options an investor can choose in light of this deposit rate hike.

1. Fixed Deposits

Are you in a fix whether to take advantage of the high deposit rates and opt for Fixed Deposits? Watch out for how long the tenure is.

Usually, banks offer better rates for short term fixed deposits than longer. This reduces commitment on the part of the bank for longer tenures. Many investors also prefer shorter lengths in anticipation of future liquidity. Currently, banks are offering almost the same rates for short and long term FDs. What if you could afford to have a section of your portfolio not needing liquidation in the next 3 to 5 years? Would it be better to opt for long term tenures now to take advantage of the reigning high deposit rates? The decisive factor here is "Reinvestment Risk", a term which describes the risk that the same advantages offered now may not be available at the time of renewal of investment.

Aditya Apte, Partner with investment advisory firm The Tipping Point says, "Individuals should look at a longer tenure if they are interested in locking in money and have no near term requirements. Interest, rates will be lower after one year when your FDs come up for renewal", as quoted by The Economic Times.

Another expert expects these rates to continue as they are more or less. Lakshmi Iyer, Head of fixed income and products, Kotak Mutual Fund, says, "We believe interest rates in India have peaked and expect them to be stable/benign going forward" quotes The Economic Times.

An investor needs to weigh in the possibility of further interest rate cuts to prevent the economy from contracting which would increase the Reinvestment Risk.