Stock market is not the place to be for conservative investors. If you do not have time for research and you don?t understand how the market behaves, you should keep a safe distance. Uninformed investors should opt for safer investment avenues like the Bank Fixed Deposit and if you are a little more adventurous you can go for company fixed deposit. Bank Fixed Deposit is the most popular investment in India. In a high interest rate era, bank fixed deposit has become more attractive. Today, banks are offering interest rates on fixed deposits in the range of 7% to 9.25%. This is a safe debt instrument where the investor need not stress with research and can be worry free till the tenure of the deposit is complete. There is enough flexibility in terms of premature closing, tenure and interest payments which makes this option very attractive. Let?s figure out how good this investment option is and who should opt for it.

Important features of a fixed deposit

Tenure of Fixed Deposit varies from 7 days to 10 years

The interest can be compounded quarterly, half-yearly or annually

Minimum deposit amount is R1,000 and there is no upper limit

Frequency of interest payment is on a monthly or quarterly basis and interest reinvestment option is also available

Interest income is taxable

Why a bank FD?

Fixed deposits are touted as one of the safest investments and one should consider investing in them because of following reasons ?

Safety Concerns: Investors, who are more concerned about safety, should go for bank FD. There is almost zero default risk and no uncertainty in future cash flows. You can align the tenure of the fixed deposit with your long term goals like a child?s marriage or education.

Source of regular income: Bank FD can be used as source of regular income as interest on the Fixed Deposit account is credited to the savings account specified by the holder on a monthly basis or on a quarterly basis.

Addressing emergency capital requirements: In cases of emergency you can withdraw money prematurely subjected to some penalty as prescribed by the bank on the date of deposit. You can also avail loan facility up to 90% of principal and accrued interest.

Almost all the banks provide this facility against your Fixed Deposit.

Extra benefit for senior citizens: Senior citizens get extra benefits in the form of higher interest rates which is 25 to 50 basis points above the normal rates.

The tax implication

Investment in fixed deposit gets slightly disappointing if we take tax perspective into account especially for investment tenure of less than five years. If we take inflation into consideration the real return we earn on fixed deposits gets even smaller.

The taxation rules on fixed deposits are quite simple. The interest earned on Fixed Deposit is added to the total income of a person and then taxed according to his tax slab. Also, if the total interest earned on all your fixed deposits is higher than Rs 10,000 in a financial year, tax is deducted at source as per the Income Tax Act, 1961.

The principal amount invested in fixed deposits with a maturity period of over and above 5 years is eligible for tax deduction under section 80C but the interest earned on the deposit is still taxable.

The other options

Other forms of deposit options available are investments in company fixed deposits, infrastructure bonds, debt oriented mutual funds and fixed maturity plans. Though they offer better returns some extra effort is required for research as there is also a certain amount of risk involved when compared to Bank FDs. Investment in company fixed deposit is the most risky but they offer the best returns as well. Sometimes the return is in the range of 14 to 15% but the investor should research thoroughly before investing in them. Initial investment of 20,000 is tax exempt in the case of infrastructure bonds and this exemption is over and above the one lakh limit making this option attractive. FMPs provide indexation benefit which reduces the tax burden of the investor and debt oriented mutual funds take exposure in equities which generates better returns for the investors.

Conclusion

In reality, no investment option is better than the other. Investment decisions always work on risk reward concept. It is the investor who has to decide what he wants from any investment and invest accordingly.

Although the taxation rules make the FD option a little less attractive once you take into account the time and knowledge factor this weakness sounds more like strength. For investing in fixed deposit you need not do much research and processing time is very fast. Post investment you need not worry about market fluctuation and economic condition.