In February 2024, Axis Bank, HDFC Bank, IndusInd Bank, and Karnataka Bank have all made adjustments to their fixed deposit (FD) interest rates. This update holds significance for individuals contemplating the initiation of an FD, as the secured interest rate remains fixed throughout the deposit tenure. In contrast to investments linked to the market, FDs provide a predetermined return established at the account’s opening. This feature can be appealing to those seeking a reliable and foreseeable income source.
Achieving optimal returns on your FD investment involves more than merely selecting a bank. Consider the following crucial factors when investing a lump sum in an FD to ensure maximum returns on FD investments.
Decide your FD tenures
A thoughtful evaluation of the duration of your FD is essential before committing your lump sum. Putting your money into FDs entails a commitment for a set period. Opting for shorter tenures provides greater liquidity, enabling prompt access to your funds when necessary. On the other hand, longer tenures offer higher interest rates but restrict accessibility. Select a tenure that aligns with your financial objectives, ensuring you don’t tie up funds unexpectedly needed.
If flexibility is your priority, contemplate implementing a ladder strategy for your FD investments. Split your lump sum into segments and allocate it to FDs with varying maturities (short, medium, and long-term). This approach provides a blend of liquidity, consistent income, and the potential advantages of future rate adjustments.
Evaluate the interest rates
Avoid accepting the initial rate you come across. Compare the interest rates provided by various banks, encompassing both private and public sector banks, nonbank financial companies (NBFCs), and smaller institutions. While online comparison tools can be useful, it is essential to check individual bank websites for the most up-to-date rates and any special offers.
Moreover, longer tenures generally come with higher interest rates. Nonetheless, it’s essential to bear in mind the unpredictability of future rate changes. Although securing a higher rate through a prolonged tenure is enticing, contemplate the possibility of seizing future opportunities for reinvestment at potentially even higher rates with shorter FDs.
In general, extended tenures come with increased interest rates. However, consider your liquidity requirements and financial objectives before committing to a lengthy period. Several banks provide elevated rates for senior citizens; capitalize on these opportunities if they apply to you.
Refine your investment approach
Break up your lump sum investment and allocate it to fixed deposits with diverse maturities (short, medium, and long-term). This strategy ensures a steady income stream, readily available liquidity, and the opportunity to take advantage of potentially increased future rates by reinvesting matured FDs.
Opt for cumulative FDs where the earned interest is compounded and added to the principal, resulting in a higher maturity amount compared to non-cumulative FDs. If eligible, explore tax-saving FDs under Section 80C for potential tax benefits, but keep in mind the lower interest rates compared to regular FDs.
Consider penalties too
Take into account the significant factor of early withdrawal penalties before deciding to invest in an FD. The majority of FDs impose penalties for premature withdrawals. The penalty levied by most banks is usually a percentage of the interest earned, typically falling within the range of 0.5% to 1.5%. This penalty is often contingent on the duration of the FD investment. For instance, early withdrawals within the first year may incur a higher penalty compared to later years. Grasp the details of these charges and their potential impact on your returns before selecting a tenure.
Fixed deposits are widely favoured as an investment option in numerous countries, India included. They provide a secure and reliable avenue for investing money and ensuring a guaranteed return. However, investors should exercise awareness regarding various factors, such as investment tenures, interest rates, associated charges, and, most importantly, aligning these choices with their financial goals, before opting to invest in one or more fixed deposits.
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Published: 14 Feb 2024, 11:46 AM IST