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Fixed Deposits offer safety to your principal and assured, regular returns on your investment. FDs can be either bank FDs (traditional FDs or Recurring Deposits) or company FDs. The interest earned on FD is subject to tax. If you are a conservative investor, you can opt for FD. However, if you are willing to invest for a long term, then SIPs in good quality mutual funds can potentially give you higher and tax efficient returns .
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The humble Mr. Fixed Deposit (FD) has historically been the favourite form of investment for many investors. When investments were not as sophisticated and varied as they are today, people generally resorted to saving in bank fixed deposits. But in today’s world, should fixed deposits form an integral part of your portfolio? When and when not should you invest in FDs? Let’s take a quick look at various aspects of Fixed Deposits.
What are the types of fixed deposits? It can either be bank FDs or Company FDs. Banks offer different term periods, with different interest rates. In addition to the traditional fixed deposit, there is another product called Recurring Deposit (RD) which works like a Systematic Investment Plan (SIP). Companies also raise money through FDs and they pay investors a prescribed interest rate depending on the tenure of the deposit. You can either opt for periodic payout of interest (monthly/quarterly/half-yearly/yearly) or a cumulative FD where the interest is paid at the end of the tenure along with the principal.
What are the types of fixed deposits? It can either be bank FDs or Company FDs. Banks offer different term periods, with different interest rates. In addition to the traditional fixed deposit, there is another product called Recurring Deposit (RD) which works like a Systematic Investment Plan (SIP). Companies also raise money through FDs and they pay investors a prescribed interest rate depending on the tenure of the deposit. You can either opt for periodic payout of interest (monthly/quarterly/half-yearly/yearly) or a cumulative FD where the interest is paid at the end of the tenure along with the principal.
Which banks offer high interest rates on fixed deposits? This is what most investors are interested in. Generally, public sector banks offer more interest compared to their private peers, although there may be exceptions. Interest rates vary from one bank to another, and also across tenures. Senior citizens are generally offered 25-50bps higher interest rate for the same tenure, although this may again depend on the bank. Company FDs are riskier compared to bank FDs and therefore offer higher interest for the same tenure as a bank FD. Among banks, City Union Bank, TamilNad Mercantile Bank and South Indian Bank currently offer the highest annual interest rates at 9.5% (1 year – 2years), 9.25% (12 months-2 years) and 9.25% (2 years) respectively. Most other banks offer around 9% per annum for a period greater than 1 year.
What is the ideal tenure of investment? This is a million dollar question. The tenure ideally depends on your goals, although this can also depend on the interest rate being offered. If there is no significant difference in rates offered between two tenures, then plan according to your goals. Again, if there is an expectation that rates may go down in the future, it is better to lock in your investments today at a higher rate. Another suggestion is to ladder your investments across tenures, i.e. to avoid locking in your money at low rates, you can consider splitting your corpus in different buckets across tenures. This also ensures liquidity to your portfolio.
What about Sweep Accounts? Makes sense? Sweep accounts offered by many banks give you benefits of both a Savings account and Fixed Deposit account. Once your balance in the Savings account crosses a pre-decided threshold limit, it is moved to a fixed deposit account where you can earn more interest. It can be useful if your savings account is frequently characterised by excess cash which is lying idle. However, you should remember that it may become difficult to keep track of the transactions and banks also charge a premature withdrawal penalty from the FD. To read more in detail about this, please click here where we have discussed all aspects of auto-sweep facility.
Is RD a better option compared to conventional FDs? An RD works like a mutual fund SIP, where you deposit a fixed amount every month in a fixed deposit account. The tenure is also predetermined. Usually RDs carry similar rates of interest as traditional FDs. You earn interest progressively on the cumulative amount deposited. So unlike a conventional FD, the interest amount you earn in a RD will be much lower, as the entire corpus is not there for the full tenure. Therefore it may not be very beneficial on that account. However, if you wish to save regularly and do not want to take the risk of equity markets, then RD is a good option to consider. It promotes discipline in saving and helps you avoid unnecessary expenditure, as you are saving the surplus amount.
What about taxation? The biggest deterrent of investing in FDs is probably the unfriendly tax treatment. Agreed that most investments are subject to tax; but in the case of FDs, high inflationary scenarios make it an unsuitable investment avenue. If interest income exceeds Rs. 10000 in a year, tax is deducted at source @10%. However, tax is applicable as per the income slab of the investor; so if there is any tax above the TDS amount, then this has to be declared and paid at the time of filing returns.
Should you invest in FDs at all? The answer to this question depends on your risk tolerance and risk appetite. If you feel capital protection is paramount along with safe returns and earning higher interest does not matter much, then FD is an ideal choice. Again, bank FDs are safe only up to an amount of Rs. 1 lakh across all banks, guaranteed by the Deposit Insurance and Credit Guarantee Corporation. Company FDs do not have this backing, and you should invest only in high rated company FDs. However, if you are willing to invest for a longer term, then consider SIPs in equity mutual funds to help you possibly get higher returns.
What about Sweep Accounts? Makes sense? Sweep accounts offered by many banks give you benefits of both a Savings account and Fixed Deposit account. Once your balance in the Savings account crosses a pre-decided threshold limit, it is moved to a fixed deposit account where you can earn more interest. It can be useful if your savings account is frequently characterised by excess cash which is lying idle. However, you should remember that it may become difficult to keep track of the transactions and banks also charge a premature withdrawal penalty from the FD. To read more in detail about this, please click here where we have discussed all aspects of auto-sweep facility.
Is RD a better option compared to conventional FDs? An RD works like a mutual fund SIP, where you deposit a fixed amount every month in a fixed deposit account. The tenure is also predetermined. Usually RDs carry similar rates of interest as traditional FDs. You earn interest progressively on the cumulative amount deposited. So unlike a conventional FD, the interest amount you earn in a RD will be much lower, as the entire corpus is not there for the full tenure. Therefore it may not be very beneficial on that account. However, if you wish to save regularly and do not want to take the risk of equity markets, then RD is a good option to consider. It promotes discipline in saving and helps you avoid unnecessary expenditure, as you are saving the surplus amount.
What about taxation? The biggest deterrent of investing in FDs is probably the unfriendly tax treatment. Agreed that most investments are subject to tax; but in the case of FDs, high inflationary scenarios make it an unsuitable investment avenue. If interest income exceeds Rs. 10000 in a year, tax is deducted at source @10%. However, tax is applicable as per the income slab of the investor; so if there is any tax above the TDS amount, then this has to be declared and paid at the time of filing returns.
Should you invest in FDs at all? The answer to this question depends on your risk tolerance and risk appetite. If you feel capital protection is paramount along with safe returns and earning higher interest does not matter much, then FD is an ideal choice. Again, bank FDs are safe only up to an amount of Rs. 1 lakh across all banks, guaranteed by the Deposit Insurance and Credit Guarantee Corporation. Company FDs do not have this backing, and you should invest only in high rated company FDs. However, if you are willing to invest for a longer term, then consider SIPs in equity mutual funds to help you possibly get higher returns.
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