We all know that Fixed Deposits offer a guaranteed growth of our money among a handful of other saving avenues, such as various Post Office schemes like PPF, MIS, KVP, etc. But what makes us turn to Fixed Deposits as preferred saving avenue are because of 2 facts:
- The returns are guaranteed and the interest rates are revised fairly regularly, unlike Post Office saving schemes.
- A hassle-free and good professional ambience of the banks.
Now, if we look at the interest rates alone in the recent times, it’s quiet attractive compared to other saving avenues. Most of the public sector banks are offering fixed deposit interests of above 9.5% and a few private sector banks above 10%. With recent uncertainty in other saving avenues, like stock market, mutual funds, etc., and with stagnant interest rates of 8% in various Post Office saving schemes, an investment in bank fixed deposits seem quite advantageous. However, like all investments, we should invest in a fixed deposit, in a best way, so as to ensure a good healthy investment portfolio. An over-investment or an under-investment in any saving avenue affects our overall portfolio returns, giving us a less chance to meet our goals.
Before I state my suggestions as to how you can invest in a Fixed Deposit, in the best way possible, I would like you to understand some critical features of a Fixed Deposit, which are generally ignored by most of us. Here they are:
- Each Fixed Deposit investment is insured upto Rs.100000/- in any bank. So, on a bank’s default, you will certainly get back your money if it’s upto Rs. 100000/-.
- A quarterly cumulative interest rate is slightly better than a yearly rate, as it will give you a slightly higher return. Hence more frequent the interest is compounded, higher the returns.
- Interest earned from Fixed Deposits are taxable income.
- Banks will levy a TDS (Tax Deducted at Source), if the interest earned is over Rs.10000/- in a financial year. You can claim a refund in your Income Tax returns later if there’s any issue with such a deduction or submit the 15G or 15H Income Tax forms with the bank before March 31st every year to avoid such complications.
- Banks also offer tax-saving Fixed Deposits, having a lower interest rate.
- Premature withdrawal attracts a penalty charge, the rates of which differ from bank to bank.
- You can take a loan upto a certain percentage of your Fixed Deposit at 2% higher interest rate than the Fixed Deposit rates itself.
I have only touched some critical features of a Fixed Deposit which you may or may not know, so as to plan our investment in the most beneficial way for us. Considering all the above points, let us now see, how we can invest in a Fixed Deposit intelligently.
- A Fixed Deposit should be made upto Rs.100000/- in any one bank. I am sure you can understand the reason from my above discussion. If you have more money to invest, simply split it among different banks.
- Never close a Fixed Deposit pre-maturely, as the penalty charges will offset whatever you may have earned from it. You must plan the tenure of the Fixed Deposit beforehand, considering whether you need the money interim or not.
- If you cannot avoid closing the account pre-maturely, opt for a sweep-in account, which different banks call by different names, which will ensure a better liquidity, if you need to break a Fixed Deposit under an emergency.
- Always give the 15G or 15H Income Tax forms to the bank, as and when you open the Fixed Deposit account, so as to avoid tax complications. Do it every financial year before March 31st during the tenure and keep a photocopy of the same.
- The Fixed Deposit should be preferably opened in joint names to avoid unforeseen circumstances. If it’s not possible, a nominee should be appointed at all costs.
- Do not take loans from a Fixed Deposit as it will increase your risk burden and liability.
- Always try to avail frequent cumulative interest rates, like quarterly or half-yearly, as the returns will be higher.
- The interest rates should at least beat the inflation rates.
- Always take a short-term view, while investing in a Fixed Deposit. Locking your money away for a long period, may induce you to break it if the rates are revised higher in the future or under any emergency. The inflation rates may also grow higher than the Fixed Deposit rates, earning you a negative income.
- Last but not the least, do keep a photocopy of all the forms while opening a Fixed Deposit account.
Now that we know how to invest in a Fixed Deposit, let’s see if this is the right time to do it or not? Well, the individual opinions always differs, but, if you ask me, I would say, that “yes, it is”. If you ask me “why”, my answer would be, “with the post office rates being lower than the inflation rates, the Fixed Deposit is the only place where the rates are marginally higher than the inflation rates.” However, I wouldn’t suggest you to go all out and invest here upto the neck. You should always consider your Fixed Deposit investments as parking your liquid cash, which you may or may not need in future. Never think of it as a long-term investment and stash away all your money in it. Remember, that the inflation rates change frequently while fixed deposit rates are, well, fixed. So, understand, that Fixed Deposits may be a guaranteed saving avenue, but it doesn’t give your portfolio the right push to make you rich.