Once you have thoroughly analysed all the stated factors, you should be able to narrow a fixed deposit scheme that will help you get good returns.
Treating FD or Fixed Deposits as more than just a parking space can help you earn better returns without taking any significant risk. Fixed deposits are known for guaranteed returns and we assume since you have landed here, taking huge risks isn’t something you fancy.
With inflation touching new heights, the economy suffering newer lows and ill-effects of Covid-19 pandemic spreading all around, it is, in fact, a wise decision to invest in a good fixed deposit scheme if you don’t want to take risks by investing in the volatile share market.
But how do you decide as to which fixed deposit scheme is the best for you? If you’re one of those who only consider a bank’s reputation and the interest it is offering on an FD, then you should consider the points mentioned further.
Factors to Help Choose the Best Fixed Deposit Scheme
Interest Rates
Interest rate plays the most important role in any fixed deposit scheme. The word fixed is directly related to the FD interest rate, i.e. once you book your FD on a particular rate of interest, it will remain fixed through the entire tenure. Therefore, a higher interest rate is your best bet. However, you should make sure that the interest rate you’re offered beats the current inflation* rate. If it is lower, your yield might go down.
Inflation rate: The rate at which our expenses are increasing and the value for money is decreasing. Currently, India’s retail inflation rate is 6.69% which is 0.04% less than what it was is July 2020.
Tenure
The second most important factor in choosing the best FD scheme is its tenure. Tenure means the period for which your money will earn interest from the bank/NBFC*. What interest rate you will get is linked to the FD tenure you choose. You will get the highest fixed deposit interest rates (up to 8.25%) on tenure ranging from 1 – 5 years.
NBFC: Non-Banking Financial Company
Compounding
Once you have decided the tenure and checked the corresponding interest rate, next comes up the compounding frequency. You will get the option of compound interest in a cumulative fixed deposit. This type of FD collects the interest accrued and in the next cycle, you earn interest on the earned interest plus the deposit amount. Total interest is paid at the end of the FD tenure with the principal (deposit amount). This sum is called as the maturity amount.
Here, if Bank X is giving you quarterly compounding (interest is added to the principal amount at every 4th month) and Bank Y is offering compounding on a half-yearly basis (twice a year), then you should consider Bank X.
To check your expected maturity amount, you can use an online FD calculator. Using a fixed deposit calculator breaks down hefty calculations and saves time too. Also, the scope of human errors in calculation is brought down to an almost zero.
Taxation
Saving income tax is everyone’s concern and a fixed deposit can help you in just that. If you can lock your savings for a minimum duration of 5 years, then you must consider investing in a tax saving fixed deposit scheme. Banks like DCB, IDFC First, IndusInd and Federal Bank are offering good tax saving FD schemes with up to 6.95% interest with preferential rates of up to 7.45% to senior citizens.
Please note: Banks deduct tax at source (TDS) @ 10% on interest income exceeding Rs 40,000 (Rs 50,000 for senior citizens) in a financial year (FY). Company FDs exercise TDS when your interest income crosses Rs 5,000 in an FY. Non submission of PAN will result in TDS rate increasing to 20%.
Flexibility and Affordability
Though fixed deposit is more of a long-term investment option, emergencies can knock anytime. For example, you have an FD for 10 years but after 2 years, you suddenly need to withdraw it. Now if your provider charges a hefty penalty, you will have to suffer on losing a portion of your interest earned. Thus, it is important to check for the penalty rates that your bank or company imposes on premature withdrawal.
Another important factor is the loan against FD. This feature pops up when you don’t need the entire FD amount to cater to your needs but just a part. For example, you have an FD of Rs 10 lakh and after a year, you need Rs 3 lakh. If your provider offers you the option of loan against your fixed deposit, you can easily get the loan amount in minutes and that too at comparatively lower interest rates.
Provider - Bank or NBFC
Another important thing to keep in mind is making a sane choice between a bank and an NBFC (Non-Banking Financial Company). NBFCs like KTDFC, Shriram Transport and PNB Housing are offering 8.09% FD rates which easily beat the inflation rate.
But with this hike in returns comes a loophole in security and that is lack of deposit insurance by the DICGC. The recent example of DHFL is enough to highlight the security aspect of corporate FDs.
However, to beat sweeping interest rates by NBFCs, you can expand your scope to small finance banks like Suryodaya and Fincare banks that are offering up to 8.25%.
Where bank (commercial banks as well as small finance banks) fixed deposits are covered by the Deposit Insurance and Credit Guarantee Corporation by RBI (up to Rs. 5 lakh), company deposits are bare in this area. This means that even if your bank goes into liquidation, your deposits of up to Rs 5 lakh are safe (per bank).
Once you have thoroughly analysed all the stated factors, you should be able to narrow a fixed deposit scheme that will help you get good returns.
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