Fixed deposits are one of the most popular savings instruments available in India. FDs are unique financial tools providing you a low-risk investment option with comparatively higher returns than savings and recurring accounts.
As this is a variant of term deposit, FDs have a specific lock-in period, which is ultimately beneficial for investors as this move enables you to benefit from the compounding effect.
Below are some of the features of FDs:
- This financial tool enables you to reduce the opportunity cost of stocking your money in savings deposit by offering a better investment option. Utilize this FD Calculator to evaluate the return on investment.
- Unlike recurring deposits FDs enable you to deposit a lump-sum amount once, for a specific time.
- Investors can choose the lock-in period they wish to avail. Generally ranging from 15 days to 10 years.
- Withdrawals are not allowed before maturity. However, in case the investor in events of emergency wishes to conduct pre-matured withdrawal he can do so by paying a penalty.
- This penalty is charged to reduce events of pre-mature withdrawal tendency. This move also benefits financial institutes and corporate firms by reducing the associated default risk.
- The FD interest rates offered differs from vendor to vendor and are dependent on the time duration of the deposit and the principal amount
- Depositors are provided with a receipt against the funds deposited, which they need to furnish at the time of maturity
- Investors have the option of renewing their FD post-maturity
- FDs indirectly boost the economic development of the country by providing the borrowers with higher cash-in-hand enabling banks and NBFCs to lend money to the corporate firms who can in turn, invest this money to contribute to the GDP.
While FDs are already a highly attractive mode of investment, investors often express concern about the liquidity, and premature withdrawals.
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. There are certain tips which enable you to earn a more attractive return on investment on your FDs –
Search for alternate options
FD options are offered by banks, NBFCs, as well as certain corporate bodies. Below is a brief comparison of the FDs marketed by banks and corporations.
Bank FDs: Banks were the first to introduce FDs, before any other financial institute or corporate. Both existing as well as new customers can avail this product. Investors can apply via both online and offline means by submitting the required documents. Certain banks also require you to avail a savings account and maintain a minimum balance to reap the benefits of the FD. Bank FDs are regulated by RBI according to the Banking Regulation Act of 1947.
Corporate FD: These are also term deposits but unlike banks, these are offered by NBFCs, corporate firms, etc. These are similar to bank FDs with a fixed maturity period and rate of interest. The tenure period of a corporate fixed deposit usually ranges between 1-3 years. Corporate FDs tend to offer a comparatively higher rate of interest as opposed to bank FDs.
Hence, if you opt to invest in corporate FDs you stand to gain better returns than their counterparts. Some argue that the risk involved with investing in Corporate FD is higher. However, the 1956 Companies Act has taken necessary steps to reduce it. As per the Companies Act, in dire circumstances if the firm is being dissolved, it should first pay off the shareholders and fixed deposit holders first to minimize investor’s loss.
Invest in multiple FDs with varying maturity
Instead of parking all your funds in a single FD divide the amount among multiple deposits and varying maturity. This is typically recommended to investors with a varying income to enable them to gain better returns than a recurring account.
While investing in multiple FDs will enable you to claim TDS exemption provided none of the FDs generate interest of more than Rs.5,000 per financial year, you can plan the maturity of these FDs co-coordinating with the occurrence of important life events.
Senior citizens enjoy better offers
Almost all banks, NBFCs, and corporate firms offer additional benefits for senior depositors by hiking the applicable interest rate by almost 0.35%. 60+ depositors also enjoy tax exemption on the interest earned from FDs. As per the 2018 financial budget, senior citizens enjoy tax benefit if the interest earned from FDs is below Rs.50,000 for each financial year.
Hence, if you wish to enjoy higher returns even if are not 60 years and above, deposit the sum in the name of your parents or grandparents and assign yourself as the nominee to the same FD.
This article can help you with better understanding of how FDs work, but you must consult a skilled financial advisor, before deciding the best investment option.