There are several reasons to start investing your money to make them inflation-proof. Today, as we witness a shift in the economic structure, many individuals and families are looking for better ways to safely invest their hard-earned money.
Investing in the market can give anyone the jitters, especially risk-averse. Equity, mutual funds, and other options can be subject to market volatility and result in unforeseen losses. However, conservative investment approaches, such as Fixed Deposits (FDs), can bring you a secure way to invest your capital. If you wish to learn how to improve your return on investments through FDs, this article will cover everything you need to know. Let’s jump right in!
What are FDs?
FDs, also known as term deposits, are investment options where you deposit a lump sum of money with a bank or a financial institution for a fixed period. This time frame usually ranges between 7 days to up to 10 years. As FD returns, you receive a fixed interest rate on your investment at the end of the term. The fixed deposit interest rates in India vary from bank to bank, depending on the tenure and the bank or financial institution.
Who should opt for FD investments?
FDs are a good option for investors looking for a secure investment option with guaranteed returns, no matter how the market sways. They are especially suitable for retirees and risk-shy investors who want to preserve their capital and earn steady returns without risking their principal. Additionally, FDs can be an excellent way to save money for a specific financial goal, such as a down payment on a home or a child’s education.
Now that we have a basic understanding of FDs, let’s discuss how to maximise your returns:
- Consider the tenure: The tenure of the FD is an essential factor that can impact your returns. Typically, longer-term deposits offer higher interest rates than shorter-term ones. However, it is important to consider your financial goals and liquidity needs before choosing a suitable investment tenure. If you need the money within a few months or a year, it’s best to opt for a shorter tenure. On the other hand, if you are investing for a long-term financial goal, such as retirement, a longer tenure can be more suitable.
- Choose the right type of deposit: Banks and financial institutions offer different types of FDs, such as regular FDs, senior citizen FDs, and tax saving FD. Each type comes with its unique benefits and interest rates. For example, senior citizen FDs offer higher interest rates than regular ones, while tax-saving FDs offer tax benefits under Section 80C of the Income Tax Act. Therefore, it’s crucial to choose the right type of deposit that suits your financial goals and offers maximum returns.
- Compare interest rates: Before investing, it’s essential to compare the interest rates offered by different banks and financial institutions. You can use online comparison tools or visit the banks’ websites to check the interest rates. It’s advisable to choose a bank or financial institution that offers competitive interest rates and has a good reputation.
- Invest in cumulative FDs: Cumulative FDs are a type of deposit where the interest is compounded annually, and the principal and interest are paid together at the end of the tenure. Investing in cumulative FDs can be an excellent way to maximise your returns as the interest earned is reinvested, leading to higher returns.
- Avoid premature withdrawals: Premature withdrawals of FDs can result in penalty charges, which can reduce your returns. Therefore, avoiding premature withdrawals and choosing tenure wisely is essential. In an emergency, you can opt for a loan against the FD rather than withdrawing.
How can you maximize your returns on FD investments?
- Opt for Cumulative FDs: In a cumulative FD, the interest earned is reinvested, and the total amount is paid on maturity. This method of interest payment yields higher returns than non-cumulative FDs, where interest is paid out periodically.
- Consider the Right Lock-in: The interest rate on FDs varies with the tenure of the investment. Longer the tenure, the higher the interest rate. Hence, opt for a tenure that aligns with your financial goals and maximize your returns.
- Invest in Company Deposits: Company deposits are FDs offered by Non-Banking Financial Companies (NBFCs) and corporates. These offer higher interest rates than bank FDs but have a higher risk. So, conduct thorough research before investing in such deposits.
- Take Advantage of Senior Citizen Rates: Banks offer a higher interest rate to senior citizens on their FD investments. As a senior citizen, you can take advantage of this benefit to earn more on your investments.
- Consider Laddering Your FDs: Laddering means investing in FDs with different tenures. This way, you can use higher interest rates on longer tenures while ensuring liquidity through short-term FDs.
- Prevent liquidating your FD before maturity: Banks levy a penalty on premature FD withdrawals. This penalty can erode a significant portion of your returns. Therefore, avoid withdrawing from your FD before the maturity date.
At the end of the day, we all are looking for effective methods to increase our net worth. While equity may give you greater return rates, it comes with the sword of market uncertainty.
However, FDs are a tried and tested method to gradually increase your passive income without stressing security. We hope that our blog can help you feel encouraged to diversify your portfolio by adding FDs to your list.