Fixed deposits (FDs) are highly regarded as one of the safest investment avenues. They provide assured returns over a fixed period, making them a preferred choice for risk-averse investors.
However, choosing the best FD scheme can be daunting due to the variety of options. This article offers crucial tips and strategies to help you select the most beneficial FD scheme, ensuring you secure the highest interest rate and optimal returns.
What Are Fixed Deposits?
FD full form is Fixed Deposit. An FD is a type of investment where an individual deposits a lump sum amount with a bank for a predetermined period. This deposited amount earns interest at a fixed rate established when the account is opened. FD holders can opt to receive the interest earned monthly, quarterly, half-yearly, or annually based on their preference.
Fixed Deposits are widely favoured as they are considered one of the safest investment options. The returns are guaranteed, eliminating the risk of capital loss. Additionally, they offer higher interest rates compared to Savings Accounts, making them a better choice for those seeking stable and predictable returns. Some tax-saving FDs can also help in reducing tax liabilities.
Why Invest in Fixed Deposits?
- Safety and Security: FDs are considered safe as they are not affected by market volatility.
- Fixed Returns: The interest rate is decided while investing and remains fixed throughout the term.
- Flexible Tenures: FDs offer a range of investment periods, from a few days to several years.
- Loan Against FD: You can take loans against your fixed deposit, providing liquidity in times of need.
Tips to Choose the Best Fixed Deposit Scheme
By following the below strategies, you can effectively choose and manage your fixed deposit investments, balancing safety, returns, and liquidity.
1. Look Beyond Traditional Bank Fixed Deposits
Corporate fixed deposits (FDs) are a relatively new concept in India compared to those offered by banks. These FDs, provided by non-banking financial companies (NBFCs) or other authorised financial corporations, typically offer interest rates that are 1-4% higher than traditional bank FDs.
Although a 1-4% increase may not seem significant at first glance, the difference in returns over the maturity period can be substantial. The higher interest rate can significantly boost savings for those with a larger investment corpus, making corporate FDs an excellent option for combating high inflation rates.
2. Check the Rating of the Fixed Deposit Scheme
When selecting a fixed deposit plan, it’s essential to consider the credit ratings provided by agencies like CRISIL. FDs with AAA ratings offer higher interest rates and greater security. You should visit the official websites of these rating agencies to filter out the top-rated FDs.
Comparing the return rates various banks and financial institutions offer is also crucial. Corporate fixed deposit schemes often offer better interest rates than some bank FDs, with rates sometimes being up to 3% higher. To maximise returns, explore high-rated corporate FD schemes over traditional bank FDs.
3. Select a Bank Fixed Deposit by Following These Tips
Bank fixed deposits are highly sought after for savings due to their higher interest rates than normal savings accounts. However, the RBI regulates the interest rates for bank FDs, which guarantees up to ₹One Lakh against the bank’s insolvency. While bank FDs may offer lower interest rates than corporate or NBFC FDs, they guarantee assured returns. Here are some tips for selecting a bank FD:
- Bank FD schemes are independent of credit ratings.
- Consider features like maturity amount, inflation-adjusted FD returns, and post-tax interest.
- For safety reasons, public sector banks are often recommended over private banks.
- Perform a comparative analysis of different banks’ interest rates and investment tenures.
- Understand the clause for premature withdrawal, as it varies from bank to bank.
- Be aware of the different types of fixed deposit schemes offered by banks.
4. Try Out Cumulative Fixed Deposit Schemes
The key difference between cumulative and non-cumulative FDs is the payout method. Non-cumulative FDs offer interest payouts monthly, quarterly, bi-annually, or annually, while cumulative FDs provide a payout at the end of the investment tenure. Cumulative FDs help generate more interest due to compound interest. If periodic payouts are not a priority and wealth generation is the goal, cumulative FDs are the best option.
5. Follow the Laddering Strategy to Maximise Returns
Laddering fixed deposits can help you earn higher returns, benefit from increasing interest rates, and maintain liquidity. Here’s an example of laddering:
Assume you have ₹5,00,000. Instead of locking it all in a single 5-year FD, split it into five smaller deposits of ₹1,00,000 each with tenures of 1, 2, 3, 4, and 5 years. Upon maturity, reinvest the first deposit for another 5 years, potentially at a higher interest rate. This approach ensures liquidity and takes advantage of higher interest rates if they increase.
Additionally, laddering tax-saving FDs can help you benefit from annual tax savings under Section 80C. Balancing risks and returns by spreading your FD amounts among various banks and corporations is also advisable, as some high-return corporates might be less stable than banks or lower-return corporates.
6. Do Not Break Your FD Before Maturity
In case of financial requirements during your investment period, you have two options: premature withdrawal or taking a loan against the FD. Premature withdrawal reduces the FD interest rate and incurs a penalty. Alternatively, taking a loan against the FD requires paying interest only on the utilised amount and for the number of days used. An overdraft facility is usually a better option than premature withdrawal.
7. Invest in Multiple FD Schemes
Investing in multiple fixed deposit schemes enhances liquidity and provides consistent returns. Break down your investment into smaller fractions and invest in different schemes with varied tenures. This strategy helps build an investment ladder, maximising your returns.
8. Minimise Risk by Working Around the Deposit Insurance
Given some banks’ financial instability, it’s important to acknowledge that all asset classes carry some risk. Although FDs are considered safe, they are not entirely risk-free. The 2020 budget increased deposit insurance to ₹5 lakhs. To minimise risk, limit the FD amount per family member to ₹5 lakhs and opt for the “either or survivor” mode when opening the FD for easier liquidation in emergencies.
9. Use a Fixed Deposit Calculator
A fixed deposit calculator is a handy tool for estimating the returns on your investment. Input the principal amount, interest rate, and tenure to calculate the maturity amount. This helps you compare different FD schemes and select the best one.
Conclusion
Choosing the best fixed deposit scheme involves carefully considering various factors such as interest rates, tenure, the credibility of the institution, and additional benefits. By following the tips and tricks mentioned above and using tools like a fixed deposit calculator, you can make an informed decision and secure your financial future with the best FD scheme available.
Remember, a well-chosen FD provides safety and security and ensures attractive returns, making it a valuable addition to your investment portfolio. Explore diverse investment options like mutual funds for potentially higher returns than fixed deposits. You can invest with Angel One today. Open a Demat account and begin your investment journey. Invest smartly; invest now!
FAQs
How do I choose the best fixed deposit?
Compare interest rates, tenures, and penalties for premature withdrawal. Consider the institution’s credibility and additional benefits. Align your choice with your financial goals and risk tolerance.
What is the 1 2 3 rule of FD?
The 1-2-3 rule suggests: Invest 1 part of your money in a 1-year FD, 2 parts in a 2-year FD, and 3 parts in a 3-year FD to diversify and manage liquidity.
How to do FD smartly?
Diversify across different tenures and institutions, monitor interest rate trends, and choose cumulative interest options for better returns. Consider tax implications and choose schemes offering additional benefits like loans against FDs.
Which is the best fixed deposit scheme?
The best scheme varies based on individual needs. Generally, look for higher interest rates, favourable terms for premature withdrawal, and additional benefits. Reputed banks and NBFCs with high credit ratings are preferable.
Which plan is better than FD?
Plans like mutual funds, Public Provident Funds (PPF), or National Savings Certificates (NSC) might offer higher returns but come with varying risks and tenures. Evaluate based on your risk tolerance and financial goals.
Is FD 100% secure?
Fixed bank deposits are considered safe and insured up to ₹5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC). However, they are not completely risk-free, especially with non-banking financial companies (NBFCs).