A fixed deposit is an excellent option to save a portion of your funds. It provides a steady stream of interest and can be much safer than equity investments or mutual funds. However, when choosing the financial institution to deposit with, carefully consider a few important factors.
Choosing the right bank or organization
You can safely open an FD account with any PSU or large private sector bank. You can also open an FD account. Many companies also invite fixed deposits at attractive interest rates to raise funds for operations.
However, don’t decide where to invest based solely on the interest rate offered on your deposit. It is one of the important considerations, but there are other details that you need to take into account.
Security
Public and private sector banks operate under the control and supervision of the Reserve Bank of India. They must comply with RBI rules and regulations and cannot default on payments.
However, if you go with a corporate FD, they are not regulated by the RBI and you take on a substantial amount of risk. Corporate FD may offer higher interest rates, but the safety of your money depends on the financial stability of the company.
Rates and charges
If you decide to close a FD before the maturity period, your bank may impose a penalty of up to 1% interest on the amount. That is, if the bank offers 7% interest on your deposit, and you withdraw the amount early, you will only get 6% interest on the deposit until the withdrawal date.
Interest and tax income
If the total interest you earn on your FD is more than Rs 10,000 per year, it will be taxable. Calculate the tax you have to pay on interest earnings and subtract it from the total annual interest earned to see if FD is a worthwhile investment.
Compound interest
If you have other sources of income, choose to reinvest your interest in the FD to earn more. The next interest calculation will be on your principal along with the interest from the previous FD. Use a fixed deposit interest calculator feature to come up with terms that fit your needs
Tax exemption
Time deposits up to Rs.1 lakh are exempt from tax under Section 80C. However, the term of the deposit must be 5 years and you cannot withdraw the money before the term. Consider the drawbacks of this and only invest if you are looking for ways to save on income tax.
Corporate fixed deposits
Corporate fixed term deposit schemes are created to allow the company to raise funds at a lower interest rate. To attract investors, companies offer high interest rates. However, carefully consider the company in which you invest your money. Many businesses take this route when turned away by banks and lending institutions.
However, not all corporate FDs are dubious. Credit rating agencies like CRISIL review these companies and provide ratings to serve as a guide for potential investors. Choose a company that is rated at least AA or higher.
When you are looking for a financial organization to open an FD, consider all of the above points before making your decision. It is a safe investment option, but your investment may not produce high returns. For that, you may need to increase your fixed deposits with investments in other schemes like SIPs and mutual funds.
