Fixed deposit is one of the traditional and most preferred investment avenues in India. Read this article to find out what you should consider before investing in FDs.
As an Indian, you might be surprised to know that in some countries, the interest rate offered on fixed deposit is as low as 0.5% to 2%. In India, fixed deposit currently earns interest rates ranging from 7 to 7.5% for terms between 1 and 10 years. No wonder, fixed deposits are one of the most preferred and popular investment avenues in the country. Other than its high-interest rates, the popularity of fixed deposit scheme is also because of the secure nature of the FD. It comes with a wide range of terms. You can choose a term as low as 7 days to as high as up to 10 years. While choosing a bank to open a fixed deposit account, select the one that offers the highest interest rates. However, the fixed deposit also comes with certain flaws. For example, premature withdrawals are not allowed or come with a penalty.
Hence, if you wish to invest in fixed deposit, it is advisable to consider a few factors while comparing fixed deposits options available in the market.
Things to consider before investing in the fixed deposit
The credibility of FD provider
It is an essential aspect while investing in fixed deposit to check the credibility of the FD provider. Even though bank fixed deposit is a secure investment option under depositor insurance program, an amount of only up to Rs. 1 lakh is insured under the scheme. Hence, it wise to check the credit rating of the bank before investing a lump sum money. You may also invest small amounts into different banks to reduce your dependence on a bank, instead of putting all your money in a single fixed deposit.
Interest rate offered
The banks offer interest rates depending on the investment term that you choose. Interest rates may vary from one bank to another. It depends on the age of the depositor as well. Interest rates for senior citizens are generally 0.5% higher than that for regular customers. You can also check the maturity amount before investing your money by using online fixed deposit calculator offered by banks.
Cumulative and Non-cumulative FD
In case of cumulative fixed deposit, you can reinvest the interest income earned on an FD. The interest is compounded, and the bank gives accumulated interest at the end of the term. However, in case of non-cumulative fixed deposit, the interest is credited to your bank account at regular intervals as per your requirement. The interest in cumulative FD is compounded and reinvested which is paid along with the principal amount. Hence, it fetches you more income. Cumulative FDs are more suitable when you are investing in a fixed deposit for the long term.
Loan against FD
During a financial emergency, you have the option to avail a loan against your fixed deposit account with the bank. Banks usually charge interest rate at 0.5% to 2% above the applicable fixed deposit interest rate on loan against FD. During a financial emergency, you can avail a loan of up to 90% of your fixed deposit value.
Premature withdrawal clause
You have to pay the penalty if you wish to liquidate your fixed deposit investment before maturity. Banks usually charge penalty by lowering the applicable interest rate by 0.5% to 1%. While selecting a fixed deposit, it is advisable to look for banks that impose a lower penalty on premature withdrawals. To be on the safer side, invest money in more than one FD rather than locking a lump sum amount in a single deposit. In case of emergency, you can withdraw funds from one of your deposits and let others grow.
How can I get maximum return from the fixed deposit?
Choose cumulative FD over non-cumulative FD
A cumulative FD earns you more returns as the interest earned is periodically reinvested in the principal amount. Your earnings will be more as you earn interest on the interest earned throughout the financial year.
Do not withdraw your deposit before maturity
Premature withdrawals work against the power of compounding. Hence, if you wish to see your money grow in a fixed deposit, avoid early withdrawals. Instead, getting a loan against your bank FD would be more sensible. By pledging your bank FD, you can get a loan of up to 90% amount of your fixed deposit.
Compare and calculate FD interest rates
The fixed deposit interest rates may vary from one bank to another. Needless to say, a higher rate of interest will bring you more profit. It is prudent to choose an FD only after comparing several options available to you. You can also calculate the maturity value by using fixed deposit calculator. It is a simple tool where you can determine the maturity amount based on current interest rates and term of the fixed deposit.
Submit Form 15g and 15h
If your income does not come in taxable slab range, you can submit Form 15g and 15h to the bank to avoid tax deduction on your FD. The Form 15g is for senior citizens above 60 years of age, whereas Form 15h is for everyone. If your yearly income is less than Rs. 2.5 lakhs, you can request the bank not to deduct TDS on the interest income by submitting Form 15h.
FD in the name of parents
In case your parents do not have any taxable income, then you can earn better returns by investing in a fixed deposit in their name. This way, you can save tax on interest income earned from an FD. Moreover, the FD interest rates are higher for senior citizens. In case your parents are above the age of 60, you can have an FD on parents name to earn 0.5% higher interest rate. A bank fixed deposit is the safest way to generate wealth and add to your well-being and financial security, provided you give it sufficient thought. Moreover, from a diversification point of view, it is sensible to hold some investment in the fixed deposit account. Most banks offer the facility of online fixed deposit where you can invest in FD through internet banking or mobile banking from the comfort of your home, office, or wherever you are.
Recommended Read: Why Fixed Deposits Are Attractive For Senior Citizens?