Deposit mania: In the case of select public sector banks, the growth in inflows of term deposits has crossed 10 per cent in the last three years.

When investors are being exhorted to invest in equities to enhance portfolio returns, the preference for bank term deposits is puzzling.

Pre-tax yields on long-term bank term deposits have come down from about 11 per cent to below 6.0 per cent now.

In contrast, a mutual fund debt scheme still promises to offer at least half a percentage point more.

In addition, the bulk of the deposit inflows are into savings deposits and other shorter-term instruments.

For a public sector bank, savings bank deposits range between 12 and 20 per cent of their deposit base.

Deposits of less than a year's maturity would constitute another 12-20 per cent.

If such a high proportion in shorter-term deposits is not suited to their investment objectives, investors can consider investing in longer-term instruments.

For example, instead of investing in a one-year instrument, investors can opt for three-year instruments. The risks are certainly higher.

However, investing consistently in shorter-term deposits is not without risks either.

There is a danger that your investment objectives will not be met. Consider that in the case of ICICI Bank, deposits of between 15 and 45 days earn only 3.5 per cent.

Alternative instruments: There was a time in 1997 and 1998 when government securities offered yields that were higher than what was offered by bank term deposits and fixed deposits of companies such as Larsen & Toubro and HDFC.

Things have now changed. Government securities now offer the lowest yields and investors no longer have the option of earning such high returns. However, alternative instruments do exist. A number of them are small savings schemes.

The inflows into high-yielding savings schemes continue to be strong.

Some of alternative instruments are:

8 per cent taxable RBI bonds

6.5 per cent tax-free RBI Bonds

6.75 per cent UTI bond (to be traded from June 16)

8 per cent taxable post office monthly income scheme

Post office recurring deposit scheme

Cumulative time deposits of post office

Floating rate schemes of mutual funds

Fixed deposits of a few housing finance companies such as HDFC and HUDCO

Fixed deposits of a few non-banking finance companies such as Sundaram Finance, Ashok Leyland Finance and Cholamandalam

National Savings Certificate and National Savings Scheme

Bonds of ICICI and IDBI that offer tax rebates

Private placement bonds of companies such as AP Power Distribution

Public Provident Fund

Some of the instruments will figure high on the risk scale. If investors are uncomfortable with this, they can be avoided.

However, investors comfortable with higher risks can opt for such instruments.

The returns of such a portfolio may well be worth the risk involved.

Plain vanilla bond mutual funds are also an option.

However, in this case, the risk to the investment value from a rise in interest rate appears high.

Investors may need to limit their allocation to such instruments.

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