How to pick the right investment scheme for you? How do Fixed Deposits Work?

  • Fixed Deposit
  • 1 Months ago
How to pick the right investment scheme for you
HIGHLIGHTS

  • How to decide which investment option is the best for you?
  • How does a Fixed Deposit Work?
  • What factors do you have to consider while comparing FDs online?


Experts recommend that the best way to inculcate the habit of savings is to make investments. There are many investment plans available in India in which people can invest their money and earn returns on their investment. Most experts advise you to start your investment journey early in life because you will have many years for the investment to multiply. This multiplication happens over several years in fixed deposit (FD) and recurring deposit (RD).

Some of the investment schemes in India are FD, RD, savings bank account, mutual funds, shares, gold, real estate, etc. Mutual funds are funds where individuals invest money regularly through a fund manager, who invests that money to buy shares. Mutual funds and shares are market-linked. They are related to stock markets, and the interest returns depend directly on the market performance. They offer high returns on investment but are also riskier than bank deposits. 

Investment options in India are divided based on risks and returns. For instance: Stock-market related investment plans offer high returns (profit), but the risk is also higher. However, a fixed deposit offers constant returns, irrespective of market performance (interest rate) for the entire duration and carries the least risk. This is the best investment scheme with a fixed rate of interest throughout the tenure and poses no risk for the investor to lose money. 

Parameters

  • FD/RD
  • Gold
  • Real Estate
  • Mutual Funds/Shares

Risk

  • Least risky
  • Low risk
  • Medium risk
  • Highest risk

Returns (profit)

  • Constant and higher than a savings account
  • Moderate
  • Moderate‐High
  • Low‐High as it is unpredictable

Liquidity i.e. ability to convert into cash

  • High
  • Low to Moderate
  • Very Low
  • High

Complexity

  • Lowest
  • Moderate
  • High
  • Highest 

How to decide which investment option is the best for you?

Investors are often confused about which is the best investment plan for them. Here are a few pointers that you should consider before investing your money anywhere: 

  • Your Goals

Goals are different for every investor as everyone has different needs and priorities. Your goals can be your post‐retirement life, your child’s higher education, his/her wedding, a house, a car, etc. Timelines for each goal for each individual are different, so invest accordingly.

For instance: If your goal is to buy a house after five years, then your investment duration will be five or less than five years. Based on these goals and investment duration, you decide which investment plans are best for you.

  • Risk‐taking Capability

There are many risk profiling tests available online that you can take to know your risk‐taking capability or risk appetite. These tests will let you know whether you should invest your money in less risky asset classes offering safe returns on investments or in risky asset classes like equity and mutual funds.

  • Historical Returns

Before investing your money in any asset class, you should look for past returns it has delivered over the years. It could be high-interest rates in an FD or past returns of a mutual fund or shares or gold for that matter. Historical returns are of the years gone by and the asset class cannot be assumed to deliver the same returns going forward. However, historical returns give you a good understanding of how this particular asset class has performed in the past. Accordingly, you can also compute the risk-to-reward ratio, since you get to know the risk element involved and also the past returns now.

  • Research 

If you are planning to invest, be it in any asset class, make sure to understand the business. For instance: If you are investing in shares of a company, research everything about that company and see if you understand their operations and business idea before putting in your money. You need to be sure of where you are investing and if there is even a slight element of doubt then clarify it with professionals. Doing your research is very important, be it a fixed deposit or mutual funds, this will help you finalize the best out of all the investment options available.

Some of the factors like death benefits, diversification, compounding benefit, risk-to-reward ratio, historical returns, etc. should be considered while comparing different investment plans. Always remember, the safety of your money is of paramount importance and the returns part is secondary. This is because you don’t want to lose your hard-earned money while fetching higher returns in the process of investing. The returns on your investment might be low but the safety of the invested money is important.  

How does a Fixed Deposit Work?

Fixed deposit or an FD is a type of banking product that falls under the category of term deposits. The ‘term’ in term deposit denotes the number of years in an FD or its tenure. It is simple and the best investment scheme for all types of investors as it offers assured returns with the least risk involved. Here’s how it works in chronological order:

  1. You make an initial deposit at the start of the FD. This is the only deposit you have to make in an FD.
  2. This deposit gets blocked for a fixed amount of time, ranging from 7 days to 10 years. You have to choose the duration of your FD, and the bank will block the money.
  3. Now, you gain interest on this deposit based on the interest rate offered by the bank. This interest amount will be paid to you at regular intervals (monthly, quarterly, bi‐annually, or annually) if you choose a non‐cumulative fixed deposit.
  4. However, if this FD is a cumulative FD, the total interest you earned will be paid at maturity only along with the principal amount. You have the option to choose between a cumulative FD and a non‐cumulative one.
  5. Multiple banks are offering the facility of premature withdrawal through which you can withdraw your deposit before its maturity. This is important when you face an emergency and you require money urgently. You can withdraw money if the initial lock‐in period has been exceeded. Look for such banks offering this facility. However, premature withdrawal comes at a penalty of lower interest rates.
  6. The Lock‐in period is the duration in which you cannot withdraw your money. This period is mostly applied in tax‐saving FDs. These fixed deposits give you tax benefits under Section 80C of the Income Tax Act 1961. High interest rates coupled with tax benefits make FD a lucrative investment option.
  7. At maturity, you are free to withdraw your money. Either you can walk into the bank to collect in cash, or the bank can transfer this money directly to your savings account.
  8. There is another option of renewal of fixed deposit through which you can extend your FD for another five years or more. It will give you more money on the next maturity date as you will be earning interest on the principal amount you deposited initially, in addition to the interest you earn on it. 

Multiple options, renewal, premature withdrawal facility, and lowest risk ensure high returns on investment on FDs. 

What factors do you have to consider while comparing FDs online?

Now that you have a basic idea of what a fixed deposit is and how it works, you should know the factors you need to consider while comparing several FD options available in India. Here it goes:

  •  Look for FDs offering high interest rates from reputed companies or banks with a dedicated history.
  • Choose the one that is aligned with your goals and finalize the tenure accordingly.
  • Research about financial institutions offering premature withdrawal facility options with the lowest penalty on such withdrawal. It will be one of the ideal investment plans in an FD.
  • Look for a bank that has online operations so that you can start an FD from the comfort of your home. Also, the interest will be credited to your account, and you will not have to collect it physically.
  • Choose cumulative FD if you will not use the money you will deposit in FD until its maturity. Else, go for a non‐cumulative fixed deposit. 

The above information aims to guide you in choosing the right investment scheme and how FDs work. If you want to know more about fixed deposits and all related terms and conditions, you can visit this link. We at Shriram City Union Finance offer the best investment schemes with the highest rates on FDs. We also give an additional 0.40% interest rate to senior citizens with multiple other facilities. Visit our website to know more about our offerings. Allow us to serve you!