Your Money: Five factors that influence your fixed deposit returns

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September 10, 2021 1:00 AM

Before opening a fixed deposit account, you must choose the right type to get the best returns

Credit rating agencies such as CRISIL and CARE evaluate multiple parameters to assign ratings to financial institutions.Credit rating agencies such as CRISIL and CARE evaluate multiple parameters to assign ratings to financial institutions.

Before opening a fixed deposit (FD) account, wise investors evaluate a few factors to maximise the returns. Here are the top five factors you need to analyse before investing in an FD.

FD duration
The duration of an FD is directly linked to its interest rate. You can typically get the best FD interest rates by choosing an extended duration. For example, 10-year FD returns are always higher than a one-year FD. The duration ranges between one year and 10 years. Hence, you can choose FDs for all types of financial goals – short-term (1-3 years), medium-term (3-5 years) and long-term (5-10 years).

Rating
Credit rating agencies such as CRISIL and CARE evaluate multiple parameters to assign ratings to financial institutions.

Any financial institution with CRISIL FAA+ or CARE AA rating is treated as the best. Hence, before opening a fixed deposit account, it is wise to check the financial institution’s credit rating to minimise your risks.

Interest rate
Presently, the best FD interest rates are hovering around 6.70%, and senior citizens can expect a 0.25% higher interest rate. Interest rates are of two types – cumulative and non-cumulative.

In the cumulative mode, the invested amount remains locked until maturity, and the accumulated interest and the principal are credited at the term-end. In the non-cumulative mode, you can earn a fixed interest amount every month, quarter, half-yearly, or annually. Hence, choose the right type to get the best returns.

Loan facility
Generally, people apply for loans when they need money urgently. But, when you open an FD account, you automatically become eligible to avail a loan against an FD. These loans allow you to withdraw up to 75% of your invested amount at a 2% higher interest rate than the prevailing best (highest) FD interest rates. In this case, the loan term equals the FD term.

Hence, if you have invested in a ten-year FD and apply for a loan in the second year, you can get eight years for loan repayment.

Financial institution
While all FDs are good, all financial institutions are not. Analyse the financial institution’s features and value-added services before opening a FD account.
If you want to get the best returns from your investment, evaluate the parameters mentioned above before opening an FD. In the world of investment, time is money.

Source: Tax Guru

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