On February 6, ICICI Bank announced the launch of ‘FD Xtra’, what the lender calls a range of innovative Fixed (FD) / Recurring (RD) deposits with exclusive new benefits to customers. The launch is timed to perfection because in the interim budget the government proposed to increase the TDS (tax deducted at source) threshold on fixed deposit and other savings products to Rs 40,000 from Rs 10,000. The FD Xtra line of products is essentially term deposits with goals. RupeeIQ decodes the product.

Why FD Xtra

The FD Xtra deposits are designed to meet the life-stage needs and goals of customers. The needs/goals can be term insurance, saving for down payment of home and car, retirement planning, child education, and travel, among others. If you invest in mutual funds or insurance (life, health etc.), you will know that the FD route is used to save money. Many customers save little sums every month so that they can do a big investment or pay the insurance premium.

Indians have a thing for fixed and recurring deposits. In March 2018, our banks had a deposit base of Rs 117 lakh crore with 58% in form of term deposits. So, deposits have been a fundamental investment for most investors, even though returns, when adjusted for inflation and taxes, are barely anything. In fact, if we assume a 5% inflation rate in India, the 1-year return (from interest income) of bank FDs falls to less than 2%. Then, there is an income tax as well on interest income, which further erodes the real return.

Even though mutual funds and ULIPs promise superlative returns, FDs and RDs are investments of last resort. At the slightest hint of trouble in financial markets, investors throng back to banks with their money. From 2014 to 2017, Indian stocks saw a great rally. Now, things are changing. With the prevailing volatility in financial markets, there is renewed interest from customers to invest in fixed and recurring deposits.

ICICI Bank interest rates on domestic deposits (less than Rs 1 crore)

ICICI Bank interest rates on domestic deposits (less than Rs 1 crore)
Period General (%) Senior Citizen (%)
7 days to 14 days 4 4.5
15 days to 29 days 4.25 4.75
30 days to 45 days 5.5 6
46 days to 60 days 6 6.5
61 days to 90 days 6.25 6.75
91 days to 120 days 6.25 6.75
121 days to 184 days 6.25 6.75
185 days to 289 days 6.5 7
290 days to less than 1 year 6.75 7.25
1 year to 389 days 6.9 7.4
390 days to 2 years 7.1 7.6
2 years 1 day upto 3 years 7.5 8
3 years 1 day upto 5 years 7.25 7.75
5 years 1 day upto 10 years 7 7.5

Product details

When market-linked returns fall or go into negative, the age-old combination of attractive interest rates, liquidity, the safety of capital and assured returns in bank deposits seem very alluring. This is why probably ICICI Bank is launching ‘FD Xtra’, a new range of fixed and recurring deposits. FD Xtra comes in the form of different products: FD Life, FD Invest, FD Income, and FD Card. In the next section, let us take a look at each one of them carefully.

FD Life – The first of the ‘FD Xtra’ deposits is named ‘FD Life’. It offers customers, who are 18-50 years of age, the dual benefit of investment growth via FD and security through a free term life insurance of one year for the FD holder. The insurance part is one of a kind combo in the industry as it offers the benefit of a free term life insurance from ICICI Prudential Life Insurance Company of Rs 3 lakh on opening an FD of at least Rs 3 lakh for a tenure of minimum two years.

Do note that many mutual funds, including Aditya Birla Sun Life, and ICICI Prudential, Reliance, also offer up to Rs 50 lakh ‘free insurance’ for SIPs.

Also Read: Mutual Funds Offering Free Life Insurance With SIP. What Is It?

In FD Life, the customer gets a complimentary insurance cover for one year. The customer has the option to renew it next year.

FD Invest – The second variant is FD Invest. It will help customers invest the interest earned on FDs in monthly Systematic Investment Plans (SIPs) of a mutual fund of their choice from ICICI Prudential Asset Management Company (ICICI Pru MF).

This is available with an FD of at least Rs 2 lakh for a minimum tenure of one year. FD Invest aims to safeguard the principal amount. Simultaneously, it offers an opportunity to customers to invest in mutual fund through the interest generated by the FD.

The FD should be of such amount that would generate monthly interest required to invest in the selected MF SIP schemes. FD Invest can be opened for any tenure ranging from 12 months to 10 years.

FD Income – Available in the form of FDs and RDs, FD Income offers customers the flexibility of receiving their maturity proceeds in the way that suits their goals.

Customers can choose to receive the entire maturity amount as a monthly income for a tenure of their choice.

Here is an example how Fixed Deposit Monthly Income Option works:

Investment Phase Payout Phase
Installment Amount Tenure Rate of Interest Total Corpus Lump-Sum Payment Tenure Monthly Payout
100000 24 months 7.25% 115,454 0 24 months 5,182
200000 24 months 7.25% 230,908 0 24 months 10,365

Alternatively, you can choose to receive 30% of the amount as lump sum on the maturity of the investment. The remaining 70% can be given as a monthly income for a tenure of their choice. Maximum tenure for all term deposits, including the investment phase and the payout phase, is 10 years.

Here is an example how Fixed Deposit with Lump-sum and Monthly Income Scheme works:

Investment Phase Payout Phase
Installment Amount Tenure Rate of Interest Total Corpus Lump-Sum Payment Tenure Monthly Payout
100000 24 months 7.25% 115,454 34636 24 months 3,628
200000 24 months 7.25% 230,908 69272 24 months 7,255

The FD Income options can be opened by resident individuals, singly or jointly. The minimum amount of deposit will be Rs 1 lakh and thereafter in multiples of Rs 25,000.

Partial withdrawal will not be permitted in both the phases (investment and payout). Premature closure will be permitted during both the investment phase as well as the payout phase by deducting the applicable penalty. It will not be possible to convert any existing FD/RD with the Bank to this product. Monthly payouts will be credited to the savings account of the customer.

The deposit will earn prevailing fixed interest rates for the entire deposit period, i.e. the same rate of interest in investment phase and payout phase. In case the rate of interest increases or decreases, the deposit will continue to earn the contracted rate of interest on both, the Investment phase and the payout phase.

As per ICICI Bank, the rate of interest will be applicable as per the total tenure, including both Investment and Payout phase. e.g. If the total tenure of the deposit is eight years bifurcated into four years investment phase and four years payout phase, the rate of interest applicable for the deposit in Investment phase as well as the payout phase will be the same as applicable for 8 years at the time of deposit opening as the customer has entered in contract for eight years.

FD Card – ICICI Bank also offers customers the convenience of an instant platinum credit card against FD without any joining or annual fees. This enables new-to-credit customers to conveniently get a credit card.

The FD Card should be of a minimum amount of Rs 10,000 with a tenure of over six months. FD Card will be opened in auto renewal mode only.

For a card, an FD can be opened as a Cumulative FD (interest reinvestment) or a Traditional FD (interest payout option). The FD will earn prevailing fixed interest rates as applicable for the deposit period for which the deposit was opened.

The FD Card can be opened by resident individuals only i.e. FD account holder where the mode of holding is either single or joint.

RupeeIQ take – ICICI Bank has redesigned FDs and RDs into feature-rich savings products. To us, it seems like an attempt to cross-sell not just FDs, but also ICICI Group life insurance and mutual funds under the aegis of ‘FD Xtra’.

Giving lifetime free life insurance under FD Life would have been a great way to attract depositors, especially since some mutual fund companies already offer term life insurance absolutely free. In FD Life, the customer gets a complimentary insurance cover for one year.

While FD Invest automates the MF investing process, it limits your investments into only ICICI Pru schemes. The only attraction are the higher interest rates. If you want to set up the same structure, you will need to keep the money in a savings account from where SIP investments in MF schemes can happen. Here, they allow you to keep the money in FDs.

FD Income seems to be targeting senior citizens and those who have opted for retirement. The monthly income option seems to be designed to capture the market for ‘safe monthly income’. At the moment, 100% safe monthly income options exist only in the post office/small savings arena and via some products in insurance space. Debt mutual fund returns are not guaranteed.

Author
Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on kumarsroy@rupeeiq.com