What is your money worth: A blog about understanding FDs and how you can make the most of them

  • Fixed Deposit
  • 22 Days ago
What is your Money Worth
HIGHLIGHTS

  • Why should I invest my money?
  • What is a fixed deposit?
  • Factors affecting your choice of FDs
  • Advantages of investing in FD scheme


A fixed deposit is the most commonly accepted investment in Indian culture. The habit of savings and investment has been passed down to us over many generations. We have been encouraged to understand the worth of money and wealth creation from a young age. Today, with the consistent rise in inflation all over the world, the value of money is decreasing.

This article talks about the benefits of investing in FDs and shows how you can create your wealth.

Why should I invest my money?

Suppose you had Rs. 100 in cash on 1st April 2020. Inflation in the economy was 4%. Now, the value of your money will be Rs. 96 (100/1.04) on 31st March 2021. If you had invested this money in an FD that provides an annual return of 6% p.a., then the value of your money would be Rs. 102 (100*1.06/1.04). It is clear that idle money decreases in value, and invested money grows with time.<

What is a fixed deposit?

A fixed deposit is an investment scheme under which you make a lump sum investment for a certain period at a fixed rate of interest. You can make these investments with post offices, banks, or NBFCs. Each of them has a different fixed deposit scheme. So, here are the features of this investment to help you select the best FD scheme.

Factors affecting your choice of FDs

Tenure: A bank FD scheme typically has a tenure of 7 days to 10 years. NBFC FDs have a tenure between 1 year to 5 years. Flexibility in choosing the tenure of your investment can be a deciding factor.

Compound interest: The interest paid on an FD is compounded. This means that the interest you earn is reinvested.

Example: You invest Rs. 10,000 for 2 years at 10% p.a. interest.

Particulars

Simple Interest

Compound Interest

Principal - 1st Year

Rs. 10,000.00

Rs. 10,000.00

Interest @ 10%

Rs. 1,000.00

Rs. 1,000.00

Principal - 2nd Year

Rs. 10,000.00

Rs. 11,000.00

Interest @ 10%

Rs. 1,000.00

Rs. 1,100.00

Total Amount

Rs. 12,000.00

Rs. 12,100.00

Banks generally compound interest quarterly in India.

Higher interest rates: Investors will go for an FD scheme that offers higher interest. NBFCs offer higher interest rates on FDs.

Offline and online fixed deposits: You can invest in fixed deposits offline as well as online. The features of the FDs are the same. But for an offline FD, you have to visit the branch. An online FD can be created without any outside help.

TDS: FDs are taxed at the normal slab rates. Banks have to deduct a TDS of 10% if the total interest is more than Rs. 10,000.

Section 80C deductions: You can claim Section 80C deductions on bank FD investments for more than 5 years. But, there is a minimum lock-in period of 3 years. You cannot make any premature withdrawal from these FDs during the lock-in period. There are no such deductions available for NBFCs, nor is there any lock-in.

ICRA rating fixed deposits: ICRA is an unbiased credit rating agency that analyzes the creditworthiness of an organization and provides its ratings. Investors prefer to make FDs with institutions that secure good ratings from ICRA. This reduces the risk of losing their money.

Advantages of investing in FD scheme

  1. Secured returns: Fixed deposit investments carry almost no risk. The investment is secured by DICGC insurance cover of up to Rs. 5 lakhs. It can also be called a secured FD scheme. Banks have to follow stringent capital norms that ensure the security of their investment.

  2. Flexible tenure: You can select any tenure between 7 days to 10 years according to your fund requirements. This flexibility in tenure can help you manage your finances better.

  3. Fixed returns: The interest payable on FDs is fixed and changes in interest rates do not affect any existing FD returns. This is a boon for risk-averse investors.

  4. Premature withdrawal: You can withdraw funds from an FD in case of an emergency. Only 1% interest is deducted as a charge for breach of contract. No other penalties are charged.

  5. Loan against FDs: You can get a loan against the FD that you hold. Banks allow a credit limit of 90% of your FD amount as a loan. You are charged only an incremental 1% interest on this loan. Since the banks have security for it, it is very easy to get.

Types of FD schemes

FDs can be grouped into many subtypes depending on the product scheme. Let’s discuss them in detail.

Cumulative scheme

Cumulative FDs offer the benefit of compounding. They reinvest the interest earned by you. So you can earn compound interest on these FDs. It is better to invest in these FDs for a longer duration because you can earn more with the compounding effect. Consider the following table. You invest Rs. 1,00,000 @ 10% p.a.

Particulars

Simple Interest

Compound Interest

5 Years

10 Years

5 Years

10 Years

Principal

 ₹ 100,000.00

 ₹ 100,000.00

 ₹ 100,000.00

 ₹ 100,000.00

Final Amount

 ₹ 150,000.00

 ₹ 200,000.00

 ₹ 161,051.00

 ₹ 259,374.25

Interest

 ₹    50,000.00

 ₹ 100,000.00

 ₹    61,051.00

 ₹ 159,374.25

Extra return

 

 

11.05%

59.37%

You can easily see the power of compounding in this example. Investing in cumulative FDs for 10 years provides an extra return of 59.37%. This means an extra return of almost 6% p.a. So effectively you are earning 16% instead of 10%. A cumulative scheme is better suited to individuals with a regular income.

Non-cumulative scheme

The interest earned on a non-cumulative FD is paid on a periodical basis. This can be monthly, quarterly, half-yearly, or annual payments. Hence, there is no reinvestment of the interest earned. If you need funds frequently, then you can invest in non-cumulative FDs as they would yield similar returns as the cumulative FDs.

If you invest in these FDs for a shorter duration, then you can manage your funds well. Having a close maturity can help you plan your fund requirements. If you do not require extra funds in the short term, you can invest the interest earned as well. The non-cumulative scheme is better suited for retired people. Since they do not have a regular stream of income, the periodical interest payouts can help them meet their day-to-day expenses.

FDs for senior citizens

Banks and NBFCs provide a higher return on senior citizen FDs of 0.5% and 0.4% respectively. This makes them more attractive for senior citizens. Banks provide this scheme for 5 years, and they carry a lock-in period of 3 years. This is because senior citizens tend to make FDs for a shorter duration. This facility is given to encourage them to invest for longer tenures.

Your selection of the best FD savings scheme depends on your goals and fund requirements. Considering the above factors can help you choose the best FD scheme. Click here to know the best FD interest rates for senior citizens.