Bank fixed deposits have been popular across all demographics for being a safe bet to invest money in. However, there are a few factors you must consider while investing in an FD.
Bank fixed deposits (FDs) have been popular across all demographics for being a safe bet to invest money in. And in 2018, this fixed income instrument offered better return than mutual funds, equity and real estate. Several equity funds fetched negative return last year causing erosion of wealth. Debt funds have fetched low return as well. In FDs, the return is guaranteed through the term, so you know how much your investment is worth. Let’s look at a few factors you must consider while comparing the FDs available in the market.
Interest offered as per the tenure
The interest rate offered varies from bank to bank basis the tenure associated, the size and the age of the depositor (whether the age is over 60 or not). The FD interest rate remains the same for the entire tenure of the investment. While the interest rate typically ranges from 4% to 8% in a year, bulk deposits attract a higher interest rate. Interest offered to senior citizens is 0.5% higher than the regular rates offered by banks.
Credibility of the FD provider
Another important aspect is the credibility of the bank. While fixed deposits are secure and no nationalised bank has defaulted ever in paying out an FD amount, under the depositor insurance program by DICGC, only an amount of Rs 1 lakh is insured. You can also refer to the credit rating of a bank to get a better idea. Instead of putting all your money in one account, you can split the investment amount into multiple banks to reduce your dependence.
Cumulative Vs. Non-Cumulative FD
Cumulative FDs allow investors to reinvest the interest earned on a regular interval to get compounding benefits and the accumulated interest is received at the end of the FD tenure. In case of non-cumulative FDs, the interest is credited in the account on a regular interval, i.e. monthly or yearly.
The interest rate in cumulative FDs is typically compounded quarterly and reinvested with the principal. Cumulative fixed deposits are suitable when you are investing to achieve a long-term goal. Non-cumulative FDs are suitable for retirees and pensioners who require interest income to meet day-to-day expenses.
Penalty on premature withdrawal
Liquidating an FD investment before the end of the tenure attracts penalty. Banks usually penalize by lowering the applicable interest rate by 0.5% to 1%. Some banks allow its customers to break the FDs prematurely without penalty, provided they reinvest the fund with the same bank on other FD products with longer tenure. Penalty charges may vary from bank to bank. So, if you are selecting an FD product, then look for banks that levy low penalty on premature withdrawals.
Loan against FD
One of the major benefits of investing in an FD is the loan facility that you get. You can avail loans against FDs during any financial emergency. Banks usually charge interest at 0.5% to 2% above the applicable FD interest rate on loans against fixed deposits. Compare and opt for the bank that offers you the lowest spread over the FD rate.
(The writer is CEO, BankBazaar.com)