Fixed deposit is among the most popular deposit options for Indian investors. Fixed interest rates combined with investment security and flexible investment terms ranging from 7 days to 10 years make fixed deposits an ideal investment solution for both short and long term investments. Fixed deposits have grown in popularity over the years as more and more investors realize the potential for higher returns through this risk-free financial product.
FDs are available from almost every bank in India, whether it is a public or private sector enterprise. Many private non-banking financial companies (NBFCs) provide FD schemes to customers. NBFCs typically offer lower interest rates than banks. They may, however, lack credibility in terms of the long-term guaranteed returns associated with this investment.
Should I be happy with my fixed deposit scheme?
Technically, the interest rate offered by banks and NBFCs is the actual return on FD investment. After conducting extensive research, you may conduct various permutations and combinations to find the optimal amount and FD term to maximize your returns and finalize the plan of your choice. It may appear that there is no more room for improvement.
Even in the case of a fixed deposit, however, the interest rate offered by financial institutions should not be regarded as absolute law. You cannot change the rate of return, but you can make adjustments to maximize your returns. It is critical to remember that the timing of your deposit is critical to maximizing your returns. Furthermore, timing is not limited to finding the right fixed deposit term; with some careful planning, you can earn guaranteed returns from multiple FD accounts, each with a different term.
To help you out here are a list of factors you should consider before investing in fixed deposits.
Factors To Consider Before Investing in Fixed Deposits
Here are a few things you should be aware of before choosing to invest in fixed deposits and decide which bank is best for FD-
- Deposit Limit
The deposit limit is the first thing to think about. The deposit limit is the maximum amount that a bank can offer in a fixed deposit. This is because banks frequently use this amount as a criterion for deciding whether or not to offer you a fixed deposit.
If you want to open your account with a larger balance than the bank allows, you will have to pay an initial fee.
- Interest Rates
The interest rates offered by various banks are the next factor to consider when investing in fixed deposits. Different banks’ interest rates can differ depending on their ratings and financial strength.
Some banks, for example, may charge lower interest rates than others because they have more branches or because their ratings are lower than those of others. As a result, before making an investment decision, it is necessary to research the best fixed deposit rates.
Liquidity is another important factor to consider before investing in fixed deposits. This refers to how quickly your funds will be available when required. Furthermore, ensure that the bank has sufficient cash reserves to pay out your fixed deposit when it matures (after a certain period).
- Tax Benefits
If you want to benefit from a tax deduction on your earnings, a fixed deposit is a good option. The government provides an interest rate deduction in the form of tax, which you can claim as an income tax exemption. The amount of interest you can claim is determined by your earnings and other factors.
The tenure of a fixed deposit is something you should think about before investing in the best fixed deposit plan. Before investing in any financial instrument, such as a fixed deposit, you should understand how long your money will be kept in the bank and the interest rates.
Best Fixed deposit strategies to follow in 2023
The investment strategy used when investing in fixed deposits is critical in determining the amount of your returns. Fixed deposit returns can be maximized with the right strategy.
You can grow your fixed deposit investment significantly over time by using these fixed deposit strategies:
- Look beyond traditional bank fixed deposits
In comparison to bank fixed deposits, corporate fixed deposits are a new concept in India. Interest rates on corporate FDs are 1-4% higher. These are provided by NBFCs or other financial institutions that are authorized to issue fixed deposits.
While 1-4% may not appear to be as high at first glance, the returns over the maturity period show a significant difference.
Furthermore, if your investment corpus is large, a higher interest rate will significantly increase your savings. Thus, corporate fixed deposits are an excellent way to combat high inflation.
- Assess fixed deposit issuers based on their credit ratings
CRISIL and ICRA credit ratings are important indicators of a fixed deposit’s dependability. The higher the rating, the more secure the investment in that fixed deposit.
However, true to the adage “higher risk, higher reward,” the highest-rated deposits offer slightly lower returns than low-rated and comparatively risky ones. To maximise returns, however, one must not overlook safety and dependability. Choose instruments with high credit ratings and evaluate them based on your investment objectives and risk tolerance.
- Consider cumulative fixed deposits
Compounding is often overlooked by new investors. While receiving periodic interest payments may appear appealing, receiving them at maturity ensures that your savings and interest compound. This allows you to increase your earnings and effectively earn more.
- Avoid liquidating your FD prematurely
Emergencies can occur at any time. While it may seem comforting to turn to your FDs for assistance, premature liquidation will reduce your earnings from the amount invested. You will also be penalised for breaching the business agreements.
An overdraft facility on your FD protects you in these situations. It will allow you to borrow from your FD and only pay interest on the amount borrowed based on the number of days it was used. Some corporations permit you to withdraw up to 75% of the amount invested as an overdraft.
- Minimize risk by working around the deposit insurance
Given the fact that many banks are struggling and experiencing crises, it is best to accept that all asset classes carry some risk. FDs, despite being deemed the safest, are not without risk. Deposit insurance has been increased to Rs. 5 lakhs in the 2020 budget.
To reduce risk, limit the fixed deposit amount per family member to 5 lakhs. When opening the FD, select either or survivor mode to make it easier to liquidate in an emergency.
- Think about the tenure of the investment carefully
Many corporations and banks offer higher interest rates for longer terms because they can use the money for a longer period of time. Longer tenures may thus appear to be a wise strategy. Another factor to consider is that historically, interest rates rise when inflation rises.
Investing for shorter periods of time and then reinvesting when interest rates rise may also be a good idea. You must choose the tenure of your fixed deposit based on whether your goals are short-term or long-term.
- Follow the laddering strategy to maximize the returns
Using the laddering strategy for fixed deposits allows you to earn high returns, benefit from rising interest rates, and gain regular liquidity.
The current economic situation is a prime example of the folly of such a strategy. Financial institutions are gradually raising FD interest rates.
If you have a large sum of money to invest, a fixed deposit is a good option. Fixed deposits and recurring deposits are low-risk investments, whereas MIS is high-risk.
While FDs are safe investments, deciding which one to choose requires careful consideration of factors such as earnings certainty, risk calculations, cash earnings, payouts, and so on. Such investments should always be planned by researching various schemes and benefits and selecting the most rewarding scheme.