There’s a changing trend in investment in recent times. The young and energetic prefer equities or mutual funds. Although such investment can help in wealth creation, it is safer for Fixed Deposits (FDs) to be a part of your investment portfolio.
Fixed deposits offer guaranteed returns and stability like no other. The liquidity they present can help you cover your urgent financial needs in a pre-defined time frame. It is the instrument to rely on to meet short-term goals.
Maximize your returns to keep certain factors in mind before investing in a Fixed Deposit. This article clearly outlines what to do.
What is a Fixed Deposit?
Fixed deposit are safe investments instruments, wherein you can invest a lump sum in a bank or Non-Banking Financial Companies (NBFCs) for a pre-determined tenure (7 days to 10 years).
Market fluctuations do not affect the interest rate. It remains stable, and you can choose to receive it at maturity or periodically during the tenure. You can break your FD before maturity at a loss of 0.5 to 1 percent of the interest rate.
Then, how can you maximize your returns from FDs? You must invest in those that offer high returns.
What Investors Must know Before Buying FDs
Rate of Interest
FD Interest rates vary. You can sum it up as follows:
- Interest rate of the Top 5 Indian Banks is – 2.5 to 5.75 percent.
- Other bank interest rate is 2.25 to 6.05 percent.
- The interest rate of Top 10 Tax Saver FD is 5.25 to 6 percent.
- Interest rate of Housing Finance Companies is 5.26 to 8.26 percent.
- The interest rate of Top NBFCs is 5.25 percent to 9.05 percent.
The above was the interest rates for the year 2021 for FDs ranging from 7days to 10 years. It depends on certain factors; Tenure, age of depositor, and the type of scheme.
For Instance, PNB Housing fixed deposit interest rate is 5.90% p.a. – 6.70% p.a. and an additional interest of 0.25 percent for senior citizens. They accept deposits for tenure from 1 year to 10 years. The minimum deposit for monthly income schemes is INR 25,000, and for others, it is INR 10,000.
A point to note here is that RBI has announced cuts in repo rates. That could reduce the FD interest rates in the future.
Credibility
NBFCs display ratings; CRISIL, ICRA, and CARE. These are credit ratings. Credit rating is the opinion of a global credit agency concerning a financial entity regarding its abilities to fulfill its financial obligations within a specific period.
Before you invest in an FD of a company, it is only proper to check their credit rating. The higher the rating of a company, the greater the assurance that you will receive interest on time and the money you deposit on maturity. Consequently, a low credit rate is an indication that the company may not fulfill its financial obligations, and you may lose your money.
Tenure
Depositors can invest in short or long-term deposits (7 days to 10 years). Plan your investments to handle interest rate risk and provide liquidity when you need funds in a pre-defined time frame. For this, you must ladder your FDs across tenure. To ladder means instead of investing a large sum in one deposit for five years, you can invest in 3 different ones that mature in 2, 4, and 5 years.
The best way to do it is to mark the year and time where you plan an item of expenditure and time the deposit likewise. When the shortest term deposit matures, deposit it for a long term; and do the same with the rest.
Ideally, spread out your deposits over various tenures and banks.
Interest Payout
Plan your interest payments according to your needs. You can opt for monthly, quarterly, half-yearly, or annual interest payouts. If you do not need the amount, you can alternatively choose to re-invest the interest. You will receive it along with the principal amount at maturity.
Premature Withdrawals
During an urgent need of funds, depositors break their FDs or close them before they reach maturity. The depositor will receive the interest accrued thereof until the date on which they withdraw the deposit. But the bank, depending on their policy, may cut a percentage (generally 1 percent) of the interest as a penalty for premature withdrawal.
Conclusion
Bank FDs suit the investors who do not want to take any risks in investment. This article guides investors to invest more safely and earn a higher ROI.
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