Investing in Fixed Deposits

Fixed Deposits, in India is probably the most common investment avenue for Investors. Markets are moving up, and in a scenario where Stock, Mutual Fund, IPO’s Investments can give you more return most people are still comfortable with their Fixed Deposits, where the return is not going to be more than 8%, most cases. The reason why, Fixed Deposits (FDs) are most common investments, is because they are conventional for domestic investors, especially for the investors in rural areas. More important thing about Fixed Deposits is they are risk free investments. But there are also some fundamental concerns in FDs also which an investor should look into while investing in Fixed Deposits.

1.Credit profile of a Fixed Deposit:

Credit profile of a Fixed Deposit investments, is an indicator of the degree of risk associated with Fixed Deposit in terms of repayment of the principal amount and interest payments. For example, an 'AAA/FAAA' rating is indicative of the highest level of safety. Typically, an FD with a higher rating would offer lower returns vis-a-vis an FD with a lower rating. The additional return in a lower rated FD is in effect a compensation for the higher risk borne. Investors would do well to decide on the quantum of risk they are willing to bear and then select an FD.

2. Rate of return

ROI is simply interest rate, on your Fixed Deposit investments. Generally most of the FD’s they don’t offer an interest rate of more than 8%, and even this interest rate will vary from bank to bank, on similar kind of Fixed Deposits. Investors will have to opt for different FD’s depending upon their interest and the one which gives them better returns on their investments, at a rating that suits them.

3. Interest payout options

Investors can generally choose between various interest payout options like monthly, quarterly, annually or on maturity. Ideally, the investor's need for liquidity should be used to determine which interest payout option is chosen. Selecting the interest payout 'on maturity' option can help investors benefit from the compounding effect and clock a higher return.

4. Tenure

The FD's tenure is the period over which the investor stays invested. By and large, a longer tenure translates into a higher rate of return. Investors must match their investment tenure with their needs/objectives. For example, if the investor has an expense to meet 3 years hence, he can invest an appropriate amount in a 3-Yr FD to ensure that the maturity proceeds match his future obligation. On the same lines, if there is a 5-Yr investment tenure, then investments can be considered in tax-saving FDs; this will help the investor simultaneously benefit from tax sops under Section 80C.

5. Premature withdrawal

An often-ignored aspect of FD investing is the premature withdrawal clause. Investors opting for a premature withdrawal can be penalised by either being given a lower rate of return or zero interest depending on the terms and conditions of the FD. Investors would do well to acquaint themselves with the implications of a premature withdrawal before making an investment.