The majority of Indians are familiar with the term “Fixed Deposit”. A Fixed Deposit (FD) is one of India’s most popular financial instruments used among investors. It also provides a higher rate of interest than any regular savings account, which is at the same time low risk. However, it is also considered one of the safest forms of investment. The following below are some of the features of a fixed deposit:
a. It is easy to open with simple documentation.
b. The rate of interest generally depends upon the amount that is deposited. The tenure and the financial institution /NBFC/Corporate typically range from 4%–8% per annum. However, do keep in mind that these rates can change at any time.
c. The money cannot be withdrawn from an FD account before its maturity except on payment of a penalty.
d. However, once the deposit matures, the financial institution credits the original amount along with interest earned to the financial institution account specified when the FD is opened.
Are you looking to invest in a Fixed Deposit Account? The Following are some valuable tips.
Shop around: In different financial institutions, they offer different interest rates on the Fixed Deposit. You must look around to find which financial institution pays the best interest rates for the amount and tenure you wish to make an investment.
Split your money: Say, for example, you have saved up to Rs. 4 lakh to invest. It would be wiser to split the amount into 4-5 FD accounts across different financial institutions. The advantage here is that if you need the money in case of an emergency, you needn’t break the entire deposit. You will just have to pay the premature withdrawal penalty for the amount you require now. With that, the rest of your money will just keep multiplying.
When you are spreading your investments across different financial institutions, you can control the penalty amount you must pay if you ever need to break the fixed deposit.
Opt for multiple FD accounts with different tenures: The rate of interest for a fixed deposit is calculated in terms of the repo rate. That means that the interest rate could potentially be fluctuating during the period of your FD. However, you can also counter this issue by just building a nest of fixed deposits that tend to have different tenures.
Tax liability on FDs: While you are investing in a Fixed Deposit, you should always keep in mind that the interest earned is taxable in line with the income bracket. And, you belong to and unlike certain other kinds of investments. You can also easily opt for a tax saver scheme.
Tax Saving FSD: While there are Tax Saving Fixed deposits available, it always comes with a lock-in period of about 5 years. You will not be allowed to break the deposit before it reaches its maturity. You must consider these circumstances before you begin investing in an FD. If you would like the flexibility of breaking a deposit, it is best not to opt for any such schemes. However, also keep in mind that if the deposit is en-cashed before it reaches its maturity, then the amount held under this instrument does not qualify for any tax deductions.
Premature withdrawals attract penalties if you are breaking a fixed deposit before it reaches the maturity date often. However, not always it will attract penalty charges. When you are withdrawing from a Fixed deposit account, it may be essential if you urgently require the funds for an emergency. In such cases the bank will allow either partial / premature withdrawal of the deposit before its completion of the deposit period, up on payment of a penalty. However, the interest payout is also affected, which is depending on how long the remaining maturity period is.
Reinvestment of Interest: In this scheme, the financial institution will be able to reinvest the interest that is accumulated in your Fixed Deposit account. It also allows the principal amount to increase. The total amount that is included when the interest earned is paid out at the time of its maturity. However, suppose your financial goal is the growth of your money, rather than having a periodic income from the interest every month or quarterly. In that case, opting for the compounding option is the best bet.
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