A well-decided financial plan entails investments that not only enable saving up for the future but provide financial aid in times of emergency as well. Fixed deposits are one such financial instrument. A fixed deposit lets you avert risks and plan your finances with flexible tenors. It helps you fulfil your long term financial goals due to its fixed interest rates and assured returns.
Tools such as the fixed deposit calculator help you calculate your returns in advance and plan your tenor accordingly. Fixed Deposits also provide flexible payouts that help you meet your financial requirements without any hassle.
7 Things to Consider Before Investing in a Fixed Deposit
Although Fixed Deposits are a safe form of investment, there are a few things that you need to consider before you invest in an FD:
Interest Rates
Fixed Deposit interest rates vary for each financial institution. But most FDs provide fixed interest rates throughout the tenor of your investment irrespective of fluctuations in the market. In addition, there is generally an additional 0.5% hike in the interest rate in case of senior citizens.
Credibility of the Provider
Fixed Deposits, although a secure form of investment, only provide insurance for an amount of up to ₹1 Lakh under the Depositor Insurance Program. Therefore, it is necessary to verify the credibility of the provider before you invest in an FD. CRISIL and ICRA are professional credit ranking agencies that rate financial institutions and help investors decide which organisation is reliable for them to invest in.
Type of Fixed Deposit
You can choose between a Cumulative Fixed Deposit or a Non-Cumulative Fixed Deposit. With a Cumulative FD you can receive your interest rate pay-outs on a monthly, quarterly, half-yearly or annual basis. Such an FD is advisable for pensioners and retired people who require regular payouts to meet their daily financial needs. On the other hand, with a Non-Cumulative FD, you can reap the benefits of compounding since the accumulated interest is reinvested with the initial deposit amount every quarter. Such an FD is preferential to meet your long term financial goals.
Tenor
Fixed Deposit tenors range from a minimum of seven days to maximum of ten years. You can either choose a short term FD, or a long term FD based on your monetary requirements. It is important to choose a tenor that is suitable to meet your financial obligations, since an early withdrawal can lead to a penalty.
Premature Withdrawal
There might arise a need wherein you’d have to liquidate your FD for emergencies. Most banks levy a penalty on premature withdrawal. Hence, it is important that you opt for a bank/NBFC with the lowest penalty charge to avoid paying a huge amount as penalty. The early withdrawal charge is generally between 0.5% to 1%. There are Banks that offer a zero penalty charge as well.
Loan Against Fixed Deposit
Instead of foreclosing your FD, you can opt for the provision of loan against your fixed deposit in case of emergencies. Financial institutions allow loans of up to 90% of your deposit amount. An interest of 0.5% to 2% above the fixed interest rate will be applicable on the loan amount. The tenor of the loan will be limited to the maximum tenor of your Fixed Deposit.
Taxation
The returns that you earn from your Fixed Deposit are subject to income tax. If your returns exceed the limit of ₹40,000 in a year, you will be liable to pay taxes as per your income tax slab. Banks are required to deduct tax before they pay the returns to the investor if the returns exceed the ₹40,000 limit in a financial year. However, you can submit forms 15 G/ 15 H and avoid tax deductions. You could also invest in a tax saving FD for a tenor of 5 years and completely refrain from paying any taxes under Section 80C of the Income Tax Act.
Advantages and Disadvantages of Investing in a Fixed Deposit
It is vital to know the advantages and disadvantages of investing in an FD before you do so.
Here’s a quick glance at everything you need to know:
Conclusion
One must always conduct a detailed study of any investment avenue before investing in it. It is crucial to familiarise yourself with the aspects of the investment before you venture into it. Fixed deposits are a reliable form of investment that help you achieve a dual goal of acquiring wealth as well as meeting your short term financial goals. A knowledge of the considerations for investing in an FD will help you make an informed decision and climb the ladder of wealth creation without any trouble.
