Things To Know Before Investing In A Fixed Deposit
For years, fixed deposits have been one of the most popular investing alternatives. It is regarded as the most secure investment for people who are hesitant to invest in high-risk financial instruments such as stocks and equity-oriented mutual funds. However, interest rates on fixed deposits have been decreasing for years, which concerns many investors, who want to earn the highest possible returns in the shortest amount of time. If you are thinking about investing in a fixed deposit, keep reading to learn about the 7 most crucial factors you should consider before investing in a fixed deposit.
When you think about a reliable yet high-return-yielding investment option, there is only one financial tool that comes to mind, Fixed Deposits. The idea here is to set aside a certain sum at a predetermined rate for a period and earn a guaranteed return on it.
Thus, it became a popular option among investors who are not willing to take any unnecessary risks. Having said that, before you invest in a Fixed Deposit, you need to keep a few things in mind; read on to learn more.
7 points to keep in mind before investing in an FD
1. Maximum and minimum deposit limit
Most banks have an FD account minimum deposit limit of Rs.1,000, but there is no upper limit to it. So you have the liberty to deposit the amount you are comfortable with and begin your investment journey. However, a point to remember here is that the higher the investment, the higher the earning.
2. Rates of interest
Every financial institution has a different Fixed Deposit interest rate policy. But regardless of market volatility, the majority of FDs offer set interest rates for the duration of your investment. Additionally, the Fixed Deposit interest rate is typically increased by an additional 0.5% for senior citizens.
Tenure for Fixed Deposits might be as short as seven days or as long as ten years. You can select either a short-term or long-term FD according to your financial needs. Since an early withdrawal could result in a fee, it's crucial to pick a tenure that will allow you to meet your financial responsibilities.
4. Fixed Deposits that don't add up and ones that do
In a non-cumulative Fixed Deposit scheme, the interest rate is regularly added to the FD account, either once a year or once a month. With cumulative Fixed Deposits, you can reinvest the interest you earn regularly. This way, you get the benefits of compounding, and you can get the accumulated interest when the period ends or when the investment matures. Most of the time, interest on cumulative deposits is added up every three months and reinvested along with the principal amount. Choose cumulative Fixed Deposits when you want to invest for the long term.
5. Withdrawing before maturity
Sometimes, you should withdraw your money from an FD before it matures. You should also find out if your bank charged a fee if you cash out too soon. Before investing in any FD of a bank, you should also look for this factor.
6. A loan based on a Fixed Deposit
When you put money into an FD account, you can get a loan if you want to. This is one of the best things about having a Fixed Deposit account. If you need money quickly, you can use your FD as collateral to get a loan.
Most banks will lend you up to 90% of the amount of your FD. The time you can have a loan is the same as when you can have an FD.
The interest you earn on your FD is taxed based on where you fall on the income tax scale. The interest earned on a Fixed Deposit is counted as income from other sources and taxed.
However, the five-year investment time of tax-saving FDs allows you to save on taxes. You are eligible for a tax deduction of up to Rs. 1.5 Lakh under Section 80C of the Income Tax Act 1961 for the interest generated on your fixed-term investment.
If you want assured profits with less risk for the short to medium term, then invest in a Fixed Deposit. But, if you are a new investor, all of this could be overwhelming. Hence, having a basic idea of what FDs bring to the table can be a great way to learn more about this financial product. And, in case you still have queries, then it is a good idea to speak with a financial expert who can advise you on your investment portfolio while considering your investment profile.