Fixed deposits have always been the first preference of the investors. The interest rates of fixed deposits are higher as compared to your saving account and other saving instruments. This is rated among the best investment tools. The higher rate of interest and assured returns increase its popularity among people in the last few years. It is also popular among people because it also offers tax benefits as well. Besides, plenty of benefits and advantages, it still has some risk factors as well. From time-to-time RBI cuts the repo rate and cash reserve ratio several times and so it affects the interest rates as well. So, it is really important to understand the different risk factors linked with Fixed deposits before you invest your money to get the higher returns on fixed deposit.
Things to Consider before Investing in Fixed Deposits
Split your investment
Fixed deposits with the banks upto Rs. 1 lakh only are backed by the deposit insurance. Therefore, it would be always better if you will split your money into Rs.1 lakh chunks and deposit accordingly into fixed deposit with different banks.
Interest Rates Risk
The biggest risk associated with the fixed deposits is interest rates risk. The risk of your money being locked up for longer tenure at a low rate of return. To overcome this factor the best thing is to split your money into different amount and invest it for different tenure as well. You should always choose different tenures to minimize the risk factor. By splitting your money into different segments will safeguard your money from interest fluctuations and at the same time will offer you better returns.
Public Sector or Private Banks
This is a tough choice to make while investing your money whether to invest in public sector bank or in private sector bank. You should always compare the rate of interest offered by the different banks before investing your money. Always, research a lot about the different tenure and interest rates offered by the banks for similar tenure to ensure higher returns on your investments. Choose a bank that will offer you higher returns be it a private or public sector bank.
Offers for Senior Citizens
All banks offer various offers for senior citizens. To lure more senior citizen customers these banks offer higher rate of interest on the fixed amount. The rate of interest of fixed deposit is either 0.5% to 1.5% higher compared to normal rates. So, before investing your money check the rate of interest or any other special offer for senior citizens.
Opt for Quarterly Compounded Interest
Always try to invest your money with a bank that calculates the compounded interest on FD at shorter duration. Always, prefer a bank that will offer compounded interest on quarterly basis. This will enable you to earn more interest. If the interest rates of FD will be calculated on yearly basis apart from the higher rate of interest you will not be able to earn higher returns on your money.
Check Company’s Profile before Investing
If you are planning to invest your money with some company or NBFCs and in cooperative societies always cross-check their profile and market reputation before investing your money. Although, the interest rates being offered here will be higher compared to the public sector banks. Therefore, when you select the company based fixed deposit, you should always evaluate the corporate name, business prospects and financial status of the company before investing your money. These companies FD are rated by agencies like CRISIL. So, take out some time and read more about these companies, their profile, reputation and market value before investing the money with them. Pay special attention to the comments or remarks made by different investors and if there is any special note given by CRISIL in regard to company’s financial health.
Calculate Fixed Deposit Returns
Interest you earn from fixed deposit also have tax implications. It is no way tax free rather tax adjusted according to your tax bracket. The interest you earn on your fixed deposit is also calculated as part of your overall income and you are supposed to pay the tax depending upon your tax slab on the total amount of interest you earned on your fixed deposit. Interest income earned from fixed deposit upto Rs. 10,000 is exempted from tax. But, if you are earning more money as interest, then you are supposed to pay the adjusted tax on this income. The bank will deduct 10% of TDS if it has your PAN card details. In case, if you don’t submit your PAN card details with the bank, it will deduct 20% TDS on the amount.