7 things to consider before investing in a fixed deposit

A well-defined financial plan involves investments that not only save for the future, but also provide financial assistance in times of emergency. Term deposits are one such financial instrument. A fixed deposit allows you to avoid risk and plan your finances with flexible terms. It helps you achieve your long-term financial goals with its fixed interest rates and guaranteed returns.

Tools like the Fixed Deposit Calculator help you calculate your returns in advance and plan your term accordingly. Fixed deposits also offer flexible payments that help you meet your financial needs without any hassle.

7 things to consider before investing in a fixed deposit

Although fixed deposits are a safe form of investment, there are a few things you need to consider before investing in an FD:

Interest rate

Fixed deposit interest rates vary for each financial institution. But most FDs offer fixed interest rates for the duration of your investment, regardless of market fluctuations. In addition, there is generally an additional 0.5% increase in the interest rate for seniors.

Supplier credibility

Fixed deposits, though a secure form of investment, only provide insurance for an amount up to ₹1 Lakh under the depositor insurance scheme. Therefore, it is necessary to check the credibility of the supplier before investing in an FD. CRISIL and ICRA are professional credit rating agencies that rate financial institutions and help investors decide which organization to invest in.

Fixed deposit type

You can choose between a Cumulative Fixed Deposit or a Non-Cumulative Fixed Deposit. With a cumulative FD, you can receive your interest rate payments on a monthly, quarterly, semi-annual or annual basis. Such an FD is recommended for pensioners and retirees who need regular payments to meet their daily financial needs. On the other hand, with a non-cumulative FD, you can enjoy the benefits of compounding since accrued interest is reinvested with the original deposit amount each quarter. Such a FD is preferential for achieving your long-term financial goals.

Tenor

Fixed deposit terms range from a minimum of seven days to a maximum of ten years. You can either choose a short-term FD or a long-term FD depending on your monetary needs. It is important to choose a term that suits your financial obligations, as early withdrawal may result in a penalty.

Premature withdrawal

There might arise a need in which you would have to liquidate your FD for emergencies. Most banks charge a penalty for early withdrawal. Therefore, it is important that you go for a bank/NBFC with the lowest penalty fees to avoid paying a huge sum as a penalty. Early withdrawal fees are generally between 0.5% and 1%. There are banks that also offer zero penalty fees.

Loan against fixed deposit

Instead of grabbing your FD, you can opt for providing loan against your fixed deposit in case of emergency. Financial institutions authorize loans of up to 90% of the amount of your deposit. An interest of 0.5% to 2% above the fixed interest rate will be applicable on the loan amount. The duration of the loan will be limited to the maximum duration of your fixed deposit.

Taxation

The returns you earn on your fixed deposit are subject to income tax. If your returns exceed the limit of ₹40,000 per year, you will be liable to pay taxes according to your income tax plate. Banks are required to deduct tax before paying the returns to the investor if the returns exceed the ₹40,000 limit in a financial year. However, you can submit Form 15 G/ 15 H and avoid tax deductions. You can also invest in a Tax Savings FD for a term of 5 years and completely forbear paying taxes under Section 80C of the Income Tax Act.

Advantages and disadvantages of investing in a fixed deposit

It is essential to know the advantages and disadvantages of investing in an FD before doing so.

Here’s a quick rundown of everything you need to know:

Conclusion

Always conduct a detailed study of any investment avenue before investing in it. It is crucial to familiarize yourself with the aspects of investing before venturing into it. Fixed deposits are a reliable form of investment that helps you achieve the dual goals of acquiring wealth and meeting your short-term financial goals. Knowing the considerations for investing in an FD will help you make an informed decision and climb the ladder of wealth building without any hassle.

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