Money, if invested well, helps grow into the wealth necessary to accomplish responsibilities and life goals. The ongoing Covid-19 pandemic has brought the importance of savings to the forefront. A fixed deposit (FD) is one of the simplest ways to not just secure your capital but also to earn assured returns.
Despite FDs offering lower interest rates, recent volatilities in the financial markets have helped people understand the value of capital safety and assured returns. The FD is a great way to save money for challenging times. Below are some tips and tricks you can use to maximise your gains from your bank deposits.
What Is A Fixed Deposit?
A fixed deposit (FD) is a lump sum investment that allows you to park your money with an entity, either a bank or a company, for a fixed period. When you invest in an entity, it works as a debt that it incurs from you for which it pays you interest either periodically or at the end of the deposit tenure. When your FD matures, you get interest earned and the refund of an amount equal to the principal investment.
FDs come in two variants – cumulative or non-cumulative. In a cumulative FD, the interest is reinvested for compounded growth. In the non-cumulative option, interest is paid out on a monthly, quarterly or annual basis.
Why Invest In FDs?
The returns for your fixed deposit are mainly decided by the tenure you choose to invest in, and it has a wide range from 7 days to 10 years. The minimum investment amount varies from bank to bank and normally ranges from Rs 1,000 to Rs 5,000. The interest rates depend on the entity you invest in and the tenure and could range from 2.35% to 10% p.a. These rates are often higher than regular savings bank accounts.
Fixed deposit is a low-risk investment option and works well for risk-averse investors. The biggest risk, in this case, is related to the collapse of the bank or company your deposits are parked. For instance, crisis struck a cooperative bank last year when the RBI discovered a fraud and placed strictures on the bank’s operations. This left the bank’s depositors with no access to their savings.
Like all investments, FDs carry risks though the extent of such risks are lower than, say, market linked investments like shares and mutual funds.
Strategy That Can Help You Maximise Benefits
Diversify Your FDs: The ideal strategy for FD investment is to have deposits with multiple banks striking the right balance between risk and returns. While FDs with government and private banks return between 3-7%, many co-operative and small banks offer 1-2% higher interest rates. If your investment is large and your risk-bearing potential is high, you can spread your FDs in low and high-return deposit schemes after assessing your risks. If you wish for higher returns, you could opt for small banks. However, be aware of the bank’s stability and hedge your risks so that you don’t feel the pinch in case the bank faces a crisis.
FD Laddering: This is a great way to maximise your FD benefits. It enables you to invest in more than one investment product of different maturities to create an investment loop. You can break your lump sum into multiple FDs of different maturities and keep reinvesting them if feasible. FD laddering helps you average out the interest rates over the long term as your corpus will earn both low and high interest rates depending on the tenure. Plus, it allows you to benefit from any higher interest offers in the future without taking undue investment risks. In case of a financial emergency, you can break one FD instead of having to liquidate the whole FD and thus lose interest. This will help you manage your liquidity better. Pre-closure of FDs are allowed but you will have to pay a penalty on the interest for this depending on the bank/company’s terms and conditions. FD laddering reduces losses in case of premature losses.
FD with ‘either or survivor’ mode: While opening an FD account, you may choose to go with this mode. So when there is an emergency, the liquidity is not a problem. For this, you can hold a joint FD with a trusted family member who can access the FD in your absence during an emergency.
Bank FDs’ rate of returns are on the lower side. But in this period of uncertainty when capital preservation has become as important as capital appreciation, you can invest in FDs to protect your money by opting for any of the strategies. Diversification is the key to an effective financial portfolio. So invest in FDs, but do consider other instruments as per your financial goals and risk appetite.
The author is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.