Introduction
Rajesh is a 22 year old guy who has just entered the corporate world. Rajesh wants to accumulate money to buy his 1st two-wheeler. For achieving this goal Rajesh has decided to set aside Rs 2,000 every month from his salary. Rather than keeping this money in a savings account (which earns him 3.5%), Rajesh decided to open a Recurring Deposit account in which he decides to contribute Rs 2,000 every month. Rajesh approaches a bank which is paying 7% interest on a 2 year recurring deposit and opens an account. Six months later interest rates have shot up due to high inflation in the economy and now the same bank is paying 8.5% on the same 2 year recurring deposit. Rajesh is upset that he started his recurring deposit a little earlier and now his money is locked up at 7% interest rate; whereas the present interest rates in the market for the same product are 8.5%. If Rajesh breaks his Recurring Deposit before the tenure of 2 years there will be a penalty.
Have you also faced such a situation in real life when you invest money in a fixed deposit or a recurring deposit and just after you invest the interest rates on deposits go up? Probably lot of us have faced this situation. But then in anticipation of interest rates going up in future should you hold on to your money in a savings account? The interest rate lost during that time period is the opportunity cost of not investing in a FD or RD account. And what if you keep waiting for interest rates to go up and actually they don't go up? In short here we are trying to time the market and the direction of interest rates; which is not a very easy thing to do. Many a times even analyst or experts find themselves caught on the wrong foot in an attempt to predict the direction of markets as markets often tend to surprise everyone by behaving in their own way.
So what is the solution???? Imagine if you were offered a deposit product which has interest rates linked to market interest rates just like floating loan interest rates.
Systematic Savings Plan (SSP)
Housing Development Finance Corporation (HDFC) has introduced "Systematic Savings Plan". This is a recurring deposit product with interest rate linked to market interest rates. The interest rates will be revised at the beginning of every calendar quarter and aligned with current market interest rates. This feature of variable interest rates makes this product unique and first of its kind deposit product.
Simply put whenever the market interest rates will move up, the deposit interest rate on this product will be revised upwards. The new increased rate will be applicable to new depositors and existing depositors also. Similarly when market interest rates will move down, the deposit interest rates on this product will also be revised downwards. The revised lower rates will be applicable to new depositors and existing depositors also.
This product is unlike normal fixed deposit products and recurring deposit products which come with fixed interest rates that are specified at the time of opening the account and remain same throughout the tenure of the product. In traditional recurring deposit products any changes in interest rates are applicable to only new account holders. Under this product an individual can contribute money on a monthly basis for any of his financial goals like buying a 2/4 wheeler, children's education, children's marriage, regular vacations. The tenure of this product ranges from 24 months (2 years) to 60 months (5 years).
Features of the Systematic Savings Plan (SSP)
Eligibility: All resident individuals can open an SSP account. This account is available at select centers where ECS facility is available.
Minimum and Maximum Monthly Contribution: SSP is a monthly plan where the individual can contribute a minimum of Rs 2,000 and maximum of Rs 50,000.
Rate of Interest: The interest rate payable on SSP is linked to the benchmark rate. The interest rate payable will change with the changes in the benchmark rate. The rate of interest (ROI) will be reset (adjusted) at the beginning of each calendar quarter.
Monthly Contribution Debit through ECS: SSP comes with the convenience of ECS (debit clearing). The monthly contribution amount is automatically transferred from the account holder's bank account to the SSP account through ECS. The account holder can specify the fixed date on which every month his bank account will be debited and the funds will be transferred to his SSP account.
Tenure: The RD account tenure can be anything between 24 months and 60 months as decided by the depositor.
Interest Payout: The interest amount will be credited to the depositor's account on 31st March every year. The interest amount is subject to TDS deduction as per TDS rules applicable.
Mode of Operation: Individuals can give an account payee cheque for the 1st month's amount in the name of "HDFC Ltd". Along with the cheque the individual needs to submit the duly filled-in application form and the ECS mandate for future month contributions. At the time of the 1st month deposit; HDFC will issue a Deposit Receipt specifying the terms of the deposit. Subsequently a consolidated statement of account with all the details of the transactions will be sent annually as of 31st March.
Nomination Facility: The product comes with a nomination facility like any other deposit product. Nomination facility ensures smooth transfer of money to the nominee in case of untimely death of the depositor.
Interest Rate Payable: With effect from 3rd February 2010the applicable rates are as follows:
| Months | Interest Rate (% per annum) |
| 24 – 35 months | 7% |
| 36 – 59 months | 7.25% |
| 60 months | 7.75% |
During the launch of the product, Mr. V.S. Rangan, Executive Director, HDFC Ltd. said, "HDFC has always been quick to recognize the market pulse and set higher benchmarks of service delivery through introduction of pioneering products and services. HDFC SSP is a disciplined approach to wealth creation. It allows the investor to adopt a systematic and dedicated approach to financial planning by inculcating a regular savings habit according to his convenience and ability. We have developed this unique instalment plan keeping in mind the safety and growth requirements of especially the younger working individuals. For investors looking at earning assured returns over a 2-5 year horizon, SSP will surely emerge as an attractive investment avenue."
HDFC SSP is an ideal product for those investors who want to invest regularly and don't want to expose themselves to capital market risks and at the same time grow their wealth for future needs.
Limitations
Although SSP has lot of good features; it does have its own share of limitations. Some of the limitations of SSP are as below:
Interest Rates going Down: The investor will benefit from the market interest rates going up as his deposit rate will also be revised upwards. But at the same time the investor is exposed to the risk of market interest rates going down. If the market interest rates go down then his deposit rate will also be revised down. This is not the case with regular recurring deposit products in which the interest rate payable is specified at the time of opening the account and remains fixed throughout the tenure of the deposit irrespective of the movement in the market interest rates.
Minimum Monthly Investment Amount: The minimum amount that can be invested monthly is Rs 2,000. Not everyone will be in a position to invest Rs 2,000 every month. Some banks offer Recurring Deposit Products in which the minimum monthly amount starts from Rs 500.
Minimum Tenure: The minimum tenure for this product is 24 months (2 years). Not everyone will be willing to lock-in his funds for 2 years especially those investors who are looking for deposits in the range of 6 months to 1 year. Some banks offer recurring deposits in which the minimum tenure starts from 6 months.
Conclusion
While there are some limitations in this product; the benefits of the product far outweigh the limitations. In a rising interest rate market scenario it makes sense to go for this product to take full advantage of rising interest rates.
Let's come back to Rajesh's example which we had seen in the beginning of this article. Now people like Rajesh can invest in HDFC SSP without worrying about market interest rates going up in future. As and when market interest rates change, HDFC will revise upwards the deposit interest rates on SSP and existing depositors like Rajesh will also be able to benefit from this upward revision in interest rates.
About HDFC
HDFC has a deposits base of over Rs. 22,000 crore, depositor base of over 10 lakh and a strong distribution network of over 25,000 deposit agents, HDFC is well equipped to offer a host of deposit products with different maturities catering to the unique needs of every investor be it individuals, trusts, institutions or corporate bodies.
HDFC Deposits provide Highest Safety, Attractive Returns and Impeccable Service Standards. HDFC is the only institution in India to have received 'AAA' rating from 2 leading credit rating agencies – CRISIL and ICRA for fifteen consecutive years for its deposits program, thus building maximum trust and confidence year-on-year. For more information visit the website http://www.hdfc.com/
