You put in a lot of effort to earn an income but it may be insufficient to fulfill your dreams and live comfortably. To achieve this, you need to save your hard-earned money in such a manner wherein it gives you assured returns. This is why investing becomes important. Keeping a balance in the bank account is not profitable, as the interest is negligible.
Investing in different instruments, such as equities, mutual funds, deposits, bonds, exchange-traded funds, and others allows you to build wealth over the long-term. Additionally, investing in various products enables you to meet your financial goals at different stages of life.
Importance of fixed deposits
Every financial instrument has advantages and disadvantages. It is overwhelming to choose the right investment product. Consider your age, financial objective, investment horizon, and risk appetite before making a decision.
One of the most popular investment options among Indians is a fixed deposit (FD). The primary reason for this is that FDs offer a guaranteed return on the investment. Additionally, you may choose the interest payout frequency (monthly, quarterly, bi-annually, or annually) as per your requirements. Alternatively, you may opt for a cumulative FD where the interest gets added to the principal, and you receive the total amount on maturity.
The ease of investing in FDs, security of returns, and liquidity (either through pre-mature withdrawal or a loan against FD) make it a popular and important investment choice. However, before you invest in FDs, here are six factors to keep in mind:
- Deposit limit
Banks, companies, and non-banking finance companies (NBFCs) issue FDs. Often, the minimum deposit for public banks is lower while most private banks and NBFCs require you to open an FD of at least INR 5,000. Most issuers do not have any maximum limit on the amount of the FD.
- Interest payout frequency
In most cases, you receive the accumulated interest along with the principal on maturity. However, you may opt for another payout frequency in case you are looking for a regular income. In addition to the FD interest rate, you must check the compounding of interest. Generally, institutions like Mahindra Finance offer semi-annual compounding in the case of non-cumulative FDs.
- Deposit tenure
Issuers offer different tenures from ranging from one year to five years, and some institutions may even provide longer periods. The interest rate varies for different tenures, and you must compare the various options available from issuers to find the best deposit.
- Premature withdrawal penalty
If you need funds to meet an emergency, you have the option to avail of a loan against the FD. However, in case you are unable to take a loan, you may have to break the deposit before its due date. Issuers levy a premature withdrawal penalty, which you must check before opening the deposit. Also, review the norms related to a partial withdrawal of the FD amount.
Every issuer provides a nomination facility at the time of opening the FD. You must name a nominee to ensure that your beneficiary receives the money in the unfortunate event of your premature demise.
- Senior citizen interest rate
Almost every bank, NBFC, and company offers a higher rate of interest to senior citizens who open an FD. You must check the same, as FDs provide a good way to earn a regular income with almost zero risks after your retirement.
Having understood the benefits of FDs and important aspects to remember while investing in this instrument, check the fixed deposit eligibility criteria, and open one today.