- Invest in Corporate Fixed Deposit
- Cumulative Deposit for Higher Yield
- Ladder Investment Strategy
- Loan Against Fixed Deposit
- Choose Longer Tenure With High-Interest Rates
Madhav is a 25-year-old individual who has just started his career with an IT company as a software professional. He is saving approximately 30% of his salary, which is lying in his bank savings account and is looking for investment options to maximise the returns on his surplus. He is not willing to take too much risk. Hence, he is not too keen on investing in stock markets as they are volatile. At the same time, he is not too eager to invest in a bank fixed deposit, as bank FDs offer far too low returns.
He is looking for an investment option that can offer him an ideal combination of high returns with low risk. During his research, he has come across corporate fixed deposits that offer this perfect combination of high returns with low risk. But, he is not sure about the investment approach that he should take to maximise his FD returns for the high rate of interest in FD. In this article, we will guide people like Madhav on the investment approach they should take to maximise their profits from fixed deposits
Madhav can take the following steps as discussed below:
1. Invest in corporate fixed deposits rather than bank fixed deposits
In the last couple of months, banks have accumulated a lot more deposits than what they are lending. As the money is lying idle with banks, they have reduced the FD return rate. As a result of this, the interest rates on some bank fixed deposits are barely able to beat inflation. But, at the same time, the fixed deposit return on corporate FDs is much better than that on bank FDs. In some cases, the FD rates offered by corporations are higher by up to 3%. So, the first step to maximise returns on fixed deposits is to invest in corporate fixed deposits rather than bank fixed deposits.
2. Do your research on who is giving the best FD returns
The next step is to identify the corporate that is giving the highest return on FD. While the high-interest rate should be the primary factor, it should not be the only deciding factor. It would be best if you research the corporate’s history, financial performance, credit rating, deposit base, etc. apart from the interest rate. If you have shortlisted two corporates where the difference in interest rate is up to 0.5%, then you should consider other features and decide. You can also split your investment between the fixed deposits of the two corporates.
3. Choose the cumulative option for interest payment frequency
Once you have decided the corporate for your fixed deposit investments, the next steps involve maximising the returns from your fixed deposits. You have the option to choose between a cumulative and non-cumulative fixed deposit. A cumulative fixed deposit will pay you the entire interest on maturity along with the principal. In a cumulative fixed deposit, the interest is added to the principal (usually quarterly). So, you earn interest on interest. This compounding effect results in a higher effective rate of interest.
4. Take the ladder investment strategy to ensure liquidity
You have decided to invest in fixed deposit with the cumulative option which will pay you the entire principal and interest on maturity. But, what if you need some money in the interim period? The simple workaround for this is to adopt the ladder investment strategy. In this strategy, you need to split your investment amount into multiple fixed deposits with different maturities and book fixed deposits online.
For example, if you wish to book FD online by investing Rs. 2,50,000, you can invest it in 5 fixed deposits of Rs. 50,000 each with maturities for 1 year, 2 years, 3 years, 4 years, and 5 years. With 1 fixed deposit maturing every year, you will have the maturity proceeds available for using it. If you don’t need the money, you can always re-invest it in a new fixed deposit. The ladder investment strategy has two benefits. First, it provides you liquidity at regular intervals. Second, it averages out the effect of changes in interest rates over time. Using the ladder investment strategy, you can ensure liquidity on a yearly, half-yearly, quarterly, or even monthly basis, depending on your liquidity needs.
5. Take a loan against the fixed deposit for short term contingency rather than premature withdrawal to avoid penalties
You have adopted a ladder investment strategy, that, for example, provides you liquidity yearly. But what if you need some money for an emergency in between? You have two options to either make a premature withdrawal or take a loan against the fixed deposit. If you go for a premature retreat, there will be a reduction in the interest rate payable plus a penalty. This may significantly reduce your returns. In such cases, check if you can get an overdraft facility against the fixed deposit. In an overdraft facility, you can use the loan amount sanctioned. You pay interest only for the amount utilised and only for the number of days utilised. So going for an overdraft facility usually works better than premature withdrawal from the point of maximising returns on your fixed deposit.
6. Submit Form 15G/15H to avoid deduction of Tax Deduction at Source (TDS)
If the interest earned on the fixed deposit is above a specified threshold, then the TDS will have to be deducted as per the Income Tax Act. So, make sure you submit your Form 15G or Form 15H (for senior citizens) to avoid deduction of TDS on your corporate fixed deposit.
7. Choose longer tenure as interest rates are higher as compared to shorter tenure
Corporations usually pay a higher interest rate on fixed deposits with a longer tenure than shorter tenure. This is because corporates get to use the money for a longer time in a fixed deposit with a longer tenure. So, if you don’t have liquidity requirements in the interim period, then invest in a fixed deposit with a longer tenure.
8. Check the credit rating
Corporates get their debt instruments like fixed deposits rated by credit rating agencies (CRAs). The CRA does a detailed evaluation of the corporate on several parameters before assigning a credit rating. The credit rating signifies the risk involved in investing in a particular corporate fixed deposit. The higher the credit rating, the lower the risk and hence lower the interest rate and vice versa. To ensure your money's safety; you should ideally invest in a corporate fixed deposit with the highest credit rating. If you wish to earn a higher rate of interest in FD, then you will have to take higher risk and invest in a corporate fixed deposit with a credit rating lower than the highest rating. In such a scenario, you need to ensure the credit rating is at least investment grade or higher.
We have discussed the above parameters to maximise returns on fixed deposits
SCUF offers fixed deposits that help you earn a high rate of interest in FD in the following manner:
1. Longer tenures with high-interest rates: SCUF fixed deposits offer the choice of different tenures (12 to 60 months) with the best FD returns. The fixed deposit return ranges from 7.25% p.a to 9.73% p.a (effective yield). The higher the tenure, the higher the FD rates.
2. Cumulative deposits: SCUF fixed deposits come with collective as well as non-cumulative options. Cumulative fixed deposits offer a higher effective yield. You can book SCUF deposits online, and also fixed deposits online.
3. Ladder investment strategy: The minimum amount for a Shriram City FD is Rs. 5,000. You can use the ladder investment strategy and make multiple fixed deposits with different maturity dates to ensure liquidity.
4. Loan against fixed deposit: SCUF offers loans against fixed deposits up to 75% of the deposit amount. A lien will be marked on the fixed deposit receipt against the loan.
5. High credit rating: SCUF fixed deposits are rated “MAA+/ with Stable Outlook” by ICRA. This rating indicates high credit quality.
Corporate fixed deposits give you an ideal combination of low risk with high returns. With a little research, individuals like Madhav can find out which corporation is offering the highest FD return. Accordingly, they can choose that corporate and take the ladder investment strategy for making fixed deposits. Checking the credit rating will ensure the safety of the money and submission of Form 15G/Form 15H will ensure there is no deduction of TDS. These simple steps will go a long way in ensuring that individuals like Madhav can maximise their FD returns