A key component of financial planning is investing money, and a fixed deposit is one of the widely used types of investments. A bank will give you a fixed interest rate on your investment in exchange for you depositing a certain amount of money with it for a specific amount of time.
Before opening a fixed deposit account, consider the following factors.
READ ON : WHY THE BANK WILL REMAIN CLOSED FOR 21 DAYS IN THE MONTH OF OCTOBER?
1. The inflation rate
Money loses value over time as a result of inflation, which lowers its purchasing power. This indicates that due to inflation, the things you can buy today for a specific amount of money will cost you more in the future. Therefore, it is crucial to take into account how inflation affects investment results. It is important to factor in inflation when calculating returns when investing in any financial asset.
If, for instance, the interest rate on your fixed deposit is 5.5% per year and the inflation rate is 6%, your profits could not be enough to offset the impacts of inflation, leading to a long-term loss in the purchasing power of your money.
2. Interest Rates on Fixed Deposits
Interest rates on fixed deposits are predetermined and unaffected by market conditions. The fixed deposit duration and the interest rates, however, can differ between banking organisations. Financial institutions typically give fixed deposits with maturities of two to three years or longer higher interest rates. If your favourite bank, for instance, offers a 4.75% interest rate on a fixed deposit for a term of 12 months but only 4.50% for a period of 6, it makes sense to choose the latter to earn an extra 0.25% interest if you intend to invest for a full year.
Before making a choice, nevertheless, it’s crucial to carry out adequate study and evaluate rates from various financial institutions. It is also crucial to keep in mind that some institutions may provide high interest rates with increasing risk. The reputation of the institution and its financial health are important aspects to take into account, as several cooperative banks have promised abnormally high fixed deposit interest rates only to go out of business.
3. Tax Breaks
Unsure of how Tax Deduction on FD functions? Well, Tax Deducted at Source (TDS) will be applied if the total interest income from all of your fixed deposits reaches INR 40,000 (or INR 50,000 for senior citizens) in a year. Investing in a tax-saver FD, which provides tax benefits of up to INR 1.50 lakh in a financial year, is one way you might be able to lower your tax obligation. It’s crucial to keep in mind, too, that this kind of FD normally has a 5-year lock-in period during which you cannot take the money until maturity.
READ ON : WHY WE CALL HRITHIK ROSHAN AS ‘THE GREEK GOD’ OF B-TOWN!
4. Fixed Deposits, both cumulative and non-cumulative
There are two varieties of fixed deposits: cumulative and non-cumulative. With a non-cumulative fixed deposit, the interest rate is credited directly into the FD account on a regular basis, either annually or monthly. On the other hand, you have the choice to reinvest the interest gained with a cumulative fixed deposit at predetermined intervals. This enables you to benefit from compounding, and you can either get the accumulated interest at the end of the term or upon maturity.
Usually compounded every three months and reinvested with the principle, interest on cumulative deposits is. In light of this, cumulative fixed deposits constitute excellent long-term investments.
5. No Appreciation in Value
Even though fixed deposits offer higher returns than savings accounts, they could not deliver returns that are adjusted for inflation or contribute to your long-term wealth creation. Therefore, it is crucial to diversify your investment portfolio based on your risk tolerance, income, costs, financial objectives, and investment horizon in order to attain your financial goals within a set timeframe.
Even though fixed deposits are a good investment choice, there are a number of additional low- to medium-risk alternatives that might provide greater returns than fixed deposits. These include debentures, debt funds, and government bonds. You can improve the possibility of greater returns and decrease overall risk by investigating several investing options and diversifying your portfolio.
6. An early departure
You can take a partial or full withdrawal from your fixed deposit before it matures if you have an emergency. However, depending on the bank’s policy, premature withdrawals are frequently subject to a fee. It is crucial to thoroughly assess the repercussions of removing money from your fixed deposit before it matures and determine whether the penalty fees are reasonable given the circumstances.
7. A loan against fixed-term investments
One of the main advantages of opening a fixed deposit account is that you can use the loan facility when you need money urgently. Banks often lend up to 90% of the value of the fixed deposit, with the maximum loan
