Tips to Check While Choosing the Right FD for Yourself: Successful financial planning requires a safe and low-risk investment portfolio. Fixed deposit (FD) is a safe investment avenue with the assurance of returns and capital safety.
It can help you balance the risk, meet urgent fund requirements, and sail through challenging times. Recently, banks have increased FD interest rates.
Tips to Choose the Right Fixed Deposit
FDs are the most popular instruments among investors of all ages. One can choose the right FD considering the following factors:
The applicable interest rate on an FD remains fixed throughout the FD tenure. Therefore, it is vital to choose the best FD rates. You can earn up to 7% interest on your FDs. The factors that drive FD interest rates include your chosen tenure, the capital invested, the financial institution, and your age.
Therefore, individuals should compare the FD rate of interest offered by various institutions based on these factors. A senior citizen FD for investors aged 60-80 years can increase your interest rate by 0.50%. This additional interest rate is 0.75% for super-senior citizen FDs with the RBL bank. You can use an online ready-to-use calculator for fixed deposits to know the difference in interest amounts with different institutions.
Flexibility of tenure
Bank FDs are flexible enough in terms of investment tenure. It can help you to meet your short-term and long-term investing goals. You need to decide on the tenure carefully as per your financial requirement. A bank FD allows you to invest between 7 days and 20 years for a tenure.
You can opt for short-term FD to accomplish your short-term goals, like a few months or a year away. Choose longer durations, like five years or more, to safeguard your funds and let them earn for you at a higher interest rate. You can use a calculator for fixed deposits to know the right tenure to accomplish your financial goals.
The Credibility of the Institution
A fixed deposit is a relatively safe investment avenue. Despite this, doing a background check while investing in FDs is a good practice. You can check the financial institution’s credibility, stability and FD credit ratings assigned by credit bureaus like CRISIL and ICRA. An FD with higher ratings can assure your peace of mind about guaranteed returns.
Sometimes, depositors must withdraw their funds immaturely to meet urgent cash requirements. Therefore, it is important to know the bank’s withdrawal norms for their FD products. Most banks levy a penalty for premature FD withdrawals. You can compare the FD interest rate that will be reduced as a penalty, say 1%, for withdrawal before maturity.
For wise investing, you can consider the laddering strategy. You can consider opening multiple FDs with different maturity periods. You can withdraw an FD with the nearest maturity date if you need urgent cash. Your other FDs will keep earning at the same interest rate.
FD investments come with two options – cumulative or non-cumulative FDs. Cumulative FDs keep reinvesting the interest earned during the tenure; therefore, the interest gets compounded. In the case of non-cumulative FDs, depositors get periodic interest amounts as per the chosen frequency. Therefore, there is no compounding benefit.
If you need interest payout monthly/quarterly/annually to meet your financial needs, you can choose a non-cumulative FD. In contrast, if you are aimed at wealth accumulation, you can invest in cumulative FD. Using a calculator for fixed deposits can show you the interest amounts for both cumulative and non-cumulative options.
If you aim at tax savings on your investments, you can consider 5-year FDs with a reputed bank. Tax benefits are available under 80C, as per existing TDS guidelines. Partial withdrawals are not allowed on tax-savings FD.
Many banks allow investors to get a loan against fixed deposits. If an FD depositor needs an urgent liquidity requirement, they can apply for a loan against FD. You can keep earning the interest amount at the same FD interest rate. Read the terms and conditions of the loan.
Thus, choose the right FD that is aligned with your financial planning. Banks offer FDs with various attractive features, and you can consider these factors to choose the right FD that can match your investing goals.