Things to Know Before Investing in Fixed Deposits
Investing in Fixed Deposits (FD) is an obvious choice for many, because of security of capital and assured interest rate that it offers. However, if other factors are not appropriately considered, actual returns from FD can be much lower than anticipated.
Below are some of the factors that need to be considered before finalizing Fixed Deposit:
Security
Protection of capital is of paramount importance when one thinks of FD. Generally, nationalized banks offer high security, however with much lesser FD interest rates. If you would like to go for a higher interest rate without compromising on security, Fixed Deposit investment comes with FAAA rated from CRISIL and MAAA from ICRA that show highest standards of safety for your fixed deposits. Tenor
Usually, the tenor of around 3-5 years gives you the highest FD interest rates. Instead of solely basing your decision on returns, you should consider your need for funds in the near future. This is because every FD has some lock-in period or no-interest period or combination of both. You can also split your investment by opening two FDs to balance the situation. For example, if you want to invest 3 Lakhs in fixed deposits, you can open an FD of 2 lakhs with a higher interest rate by opting for five-year tenor and you can invest the rest in another FD of one-year tenor. This way you would be able to safeguard funds for any unforeseen requirements in the near future.
Rate of Interest
FD Interest rates vary according to the bank and the tenor that you choose. One can usually get a higher interest rate on an investment horizon of three to five years. If you are a senior citizen, you can also avail rate of interest that is much higher than the standard rate. You should also consult your financial planner or use online FD calculator to optimize your finances according to the interest rates that you would get.
Flexibility
Fixed Deposits lets you choose whether you want to get your interest every month, quarter, half yearly or yearly in non-cumulative FDs. If you don't need regular interest income, you can go for cumulative FD so that your investment keeps compounding and you can earn higher FD interest rates. At the same time, make sure you check the terms and conditions for premature withdrawal so that you do not risk losing the interest income.
Ease of Investing
Nowadays it is very easy to invest in FD online through internet banking and mobile banking. However, you should have a savings bank account in the same bank to avail this facility. However, you can also choose to go for NBFCs like Bajaj Finance that offers high interest rates and does not require much documentation. By going for online FD application, you can also easily compare all the options available.
Ease of Getting money at maturity
While starting an FD has now become comfortable, make sure you know how you are going to get your money back. Always ensure that you enable auto credit of your maturity amount in your bank account. You can also choose "Auto-Renewal" option, which automatically renews your FD if you do not withdraw your money on maturity.
Taxation
Fixed Deposits in the name of senior citizens and HUF is more tax effective, subject to other income into consideration. However, make sure you consider all the regulations when you think of clubbing the income. Make sure you take proper advice from your financial planner before you decide on the option you want to go with.