What Should You Know Before Investing In A Fixed Deposit?

Investing In A Fixed Deposit
Investing In A Fixed Deposit

Fixed Deposits (FDs) are amongst the most preferred long term investment tools offering assured returns at certain terms at the prevailing interest rates in the market and manage your financial risks. While providing safety to your capital is the first function, that is not the only thing. There are several facts investors should know before investing. Some of them are discussed below:

1. FDs are liquid 

When you can convert investments in cash easily, it is called a liquid asset. If the lump sum amount has to be used in the future and you want to keep it safe and grow at the same time, you should choose an FD because of its reliability feature. Whenever you need your money, you can withdraw from an FD prematurely. Though a penalty is involved in premature withdrawal, still, FDs are considered a liquid asset. 

To eliminate premature withdrawal penalties, you should ladder your fixed deposits. This will keep giving you a payout with a time period difference of when the deposits have been made. 

2. Interest Rate Privileges

When it comes to returns, every investor wants to earn returns at high-interest rates. Yes, you are right, interest rates depend on prevailing market situations but financiers offer some advantages on interest rates also and you can earn at a higher interest rate such as additional interest rates on renewals of FDs, opening an online FD account and higher interest rates for senior citizens.

For example, Bajaj Finance FD offers additional 0.25% interest rate to senior citizens, additional 0.10% interest rate to online customers  and an additional 0.10% interest rate to investors who opt for auto-renewal of their FD. 

Here, you should know that corporate fixed deposit offers higher interest rates than bank FDs. For example, Bajaj Finance FD offers highest interest rates up to 6.85%, which is 1-2% higher than average bank FD rates.

3. Types of investment in FDs

With most financiers, there are two types of fixed deposits. Cumulative and Non-cumulative. If you want cumulative interest on the maturity date, go for cumulative FDs. If you want regular income, you can choose a non-cumulative FD for frequent interest payouts i.e. monthly, quarterly, half-yearly or annual. 

Depending on the choice of the depositor, interest rates will be calculated. With Cumulative term deposit, you will earn a higher interest rate as the interest will be cumulated over the term of the deposit. 

4. Loan against fixed deposit 

Fixed deposit is a safe and smart investing tool. If there is an urgent requirement of funds, you have another option than premature withdrawal. There is the availability of loans against fixed deposits. You can get a loan of 80-90% of the FD value. This can prove to be a handy loan for an emergency.

5. Automatic Renewal 

Most of the financiers renew FDs automatically if you have instructed them to do so at the time of opening an FD account. It’s an option to choose or opt out this facility.  Even after opening the FD, you can go to your bank branch to opt it.

6. Taxation 

Interest on FDs is taxable in the hand of investors as per their applicable income tax slab. There are tax-saving FDs that offer tax deductions up to Rs.1.5 lakh under section 80C. You need to submit form 15G to your FD issuer to avoid taxes.

The TDS deduction threshold limit has been increased on interest income. From AY 2020-21, it is Rs.40,000 annually. For senior citizens, the maximum limit is Rs.50,000. They can get tax benefits under Section 80TTB.  For a company FD, you will receive TDS break up to Rs 5,000 of interest income.

7. Safety

Though fixed deposits are secured investments, one should check the credit ratings of the FD issuer. Choose entities with higher credit ratings such as FAAA/STABLE and MAAA/STABLE.

8. FD interest rates 

The interest rate that is applicable on an FD varies from bank to bank. The bank FD rates have been decreasing in recent times because the RBI reduced the repo rate and took a few other measures to increase liquidity in the economy.

To grow your investments at a higher rate you can invest in company FDs that provide better interest rates than bank FDs. Bajaj Finance offers interest rates up to 6.85% on its FD plans. This is 1-2% higher than regular bank FD rates. You can invest in one of its FD plans to ensure higher returns post maturity. 

9. Stability 

Though FDs are considered to be risk-free instruments, it is always better to check the credibility of the issuer before investing your money. The recent economic conditions underline the need to check the stability ratings of FD plans.

Bajaj Finance FD has received MAAA/stable rating from ICRA and FAAA/stable rating from CRISIL which are the highest ratings that ensure the safety of your deposits. 

10. Systematic Deposit Plan 

You can also invest in a monthly deposit option called Systematic Deposit Plan that allows you to deposit a fixed monthly amount (starting from Rs. 5000) every month. 

The number of deposits can vary from 6 to 48. Also, you can choose a tenor up to 60 months in such a way that all the deposits will mature on a single date or each deposit will mature after completing its tenor (which is the same for all the deposits). 

This choice has to be made by you as per your financial requirements. The interest rate that prevails on the deposit date will be applicable for every deposit under the SDP plan. 

Fixed deposit plans are offered by banks, NBFCs, and post offices as well. However, to continue growing your deposit at a higher rate, you can invest in NBFC FD such as Bajaj Finance FD that is offering interest rates up to 6.85%. You should also consider other factors like tenor, stability, interest payouts, liquidity options, etc before investing in an FD plan.

For making your decision easy most banks and finance companies offer an FD monthly payout calculator on their portals that calculates your returns in advance. You can also invest in Systematic Deposit Plan from Bajaj Finance to invest in FD on a monthly basis starting at Rs. 5000 per month.

So, you have known main reasons that make fixed deposits the safest investment and why many investors make it a part of their investment portfolio. An FD is a smart investment to grow savings over a period of time.

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