Investing in a fixed deposit is smart as it is a reliable investment option to secure and grow your wealth. You can book a fixed deposit with a company or a bank to generate wealth at a fixed rate of return. Best of all, fixed deposits are unaffected by market volatility, making them ideal for most investing goals.
The interest rate on FDs varies based on several factors, ranging from FD type to issuer and economic factors. Moreover, as a senior citizen, you can enjoy a higher rate of interest, over and above the base rate. This is a special feature of fixed deposits and is extended by most issuers.
While it is vital to know such facts about FDs, it is also important to understand the key terms of the instruments. This includes the interest rate, and how it is impacted by the tenor you choose and other external factors. For insights into these aspects of the fixed deposit, read on.
What Are Fixed Deposits?
Fixed deposits are safe and fixed income investment options. Once you lock in your corpus for a specific timeline at a fixed rate of interest, you can be sure that you will get returns on the maturity date. Due to this fact, it is a great idea to include it in your portfolio.
Another vital point here is that your interest earnings at the end of the tenor is independent of market fluctuations. With flexible tenors to deposit your investment, you can choose a timeframe from anywhere between 7 days and 10 years, depending on the issuer.
Best of all, you need not worry about accumulating large funds to start investing in fixed deposits. Some issuers allow you to book a fixed deposit with a minimum amount of just ₹1,000. This flexibility also extends to the payout mode. You can choose to get the earnings as a lump sum on the maturity date or periodically.
These are known as cumulative or non-cumulative fixed deposits. The type you choose should depend on your investing goals, as the FD can help you work toward a wide-range of financial objectives. Considering all these benefits and features, it isn’t surprising that FDs are as popular as they are among investors.
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What Are The Key Factors To Consider Before Investing In Fixed Deposits?
While parking your funds in a FD is smart, it is crucial to consider certain factors before opening a fixed deposit. Firstly, to maximise your returns, you need to consider your investment amount, timeline, and the interest rate offered. While you can choose a tenor between 7 days and 10 years, understand that a longer tenor is better.
The longer you stay invested, the better your earnings with a cumulative fixed deposit. Secondly, it may be better to invest a larger sum. Ideally, you should invest as much as you can for the best results. Thirdly, the interest rate you get is not fixed and will vary from one issuer to the other. As such, you should compare the interest rates and pick an instrument with a high rate.
Lastly, assessing your financial needs is key before you invest. If you require earnings in the next year, park them in a short-term FD. In case, you do not require funds immediately, pick the longest tenor possible to maximise your earnings.
What Are The Different Types Of Fixed Deposits?
Standard fixed deposits are the most common types provided by many issuers. Here, you deposit your corpus for a tenor of your choosing and at a fixed interest rate set by the issuer.
If you invest in a tax saver FD, the amount you deposit is eligible for tax exemption as per the Section 80C of Income Tax Act. One point to note here is that the interest earned may not be eligible for tax. This type of FD is different from the standard one because of its tenor.
With a tax saver FD, you have to lock your corpus for at least 5 years. You can enjoy tax benefits up to ₹1.5 Lakhs for a financial year in a tax saver FD. In addition to this, you can choose between cumulative and non-cumulative FD.
Here, the main difference is the payout mode and the interest rate offered to you. In general, cumulative fixed deposits will have a higher interest rate, making it the ideal choice for wealth generation.
What Are The Factors That Impact the Interest Rate?
There are many factors governing the interest rate of an FD. While tenor plays a crucial role in deciding the interest rate, the economic climate does matter as well. Here, one particularly important factor is the Reserve Bank of India’s (RBI) repo rate.
This is an external benchmark that many issuers utilise to determine the interest rates offered. When the RBI increases the repo rate, the FD interest rates increase, and vice versa. The inflation rate also plays a crucial role in changing interest rates, as the RBI makes corrections to the repo rate accordingly. Apart from these factors, the issuer’s internal policies may impact the interest rates as well.
With many NBFCs and banks offering competitive rates, you should choose an issuer that allows you to get the most value. Choose the right FD that aligns with your financial goals and requirements. Compare the interest rates online and select a tenor that allows you to maximise your earnings in a given window.