Smart Savings: A Complete Guide to Fixed Deposits – Part 1

Diversified players in the market:

Banks, post offices and Non-Banking Finance Companies (NBFCs) offer fixed deposit accounts.

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Assured returns:

One of the key benefits of investing in a fixed deposit account is the certainty of receiving fixed returns in the form of interest. Compared to other investment options like Mutual Funds, Equity, etc., this means that you do not have to worry about market fluctuations affecting your returns. Further, the period of investment for an FD is closely linked to its interest rate.

Minimum Deposit Amount:

Fixed Deposits have a low minimum investment requirement, making them accessible to a wide range of investors, including those with small amounts to invest.

Flexible tenure:

The tenure of the FD can be chosen according to your financial goals, ranging from a few days to a decade. That is, women investors can choose the tenure that suits their financial goals and investment needs.

Loan Against FD:

One of the options not known to many, banking institutions provide the ability to borrow against an FD. One can avail of a loan of up to 90% of the principal FD amount. This is a significantly useful feature available during financial emergencies, and being able to access funds quickly in times of need without having to liquidate investments is particularly beneficial. Also, loans against FDs are typically associated with lower interest rates than personal and other types of loans. Additionally, you will be eligible for a loan against FD with minimal paperwork and shall continue to earn interest on your investment.

Tax deductions:

There are tax deductions, which means a deduction under Section 80C of the Income Tax Act can be claimed. These allow you to invest up to ₹1.50 lakh annually and save on taxes by investing in 5-year Tax-Saving Fixed Deposits.

Senior Citizen FD:

Banks and other financial institutions offer special FD schemes with higher interest rates for senior citizens.

Periodic interest payouts:

Identifying a fixed deposit that provides a higher interest rate for an FD is essential to maximise returns. Senior citizens can take advantage of a 25 to 50 basis points (bps) rate increase above the normal rate (for non-seniors). It is important to note that the interest rates may differ for each payout option, and one should analyse the options based on the frequency of returns they warrant.

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Diversification:

FDs complement a diversified investment portfolio by adding stability. One way is to spread out your investments across different deposit periods. For example, instead of investing all your money in a one-year FD, you can invest some in a six-month FD, another portion in an 18-month FD, and so on. This will help you benefit from the liquidity offered by deposits with a short duration while having an advantage of the higher interest rates offered by deposits with a longer tenure. The other option is to Invest in a mix of banks and non-banking financial companies (NBFCs), which offer multiple fixed deposit options and different rates of interest.

Liquidity:

FDs offer emergency or premature withdrawals, subject to a nominal charge or opting for lower interest rates and any other conditions specified by the bank or company. This option offers liquidity and financial flexibility in the case of unforeseen events.