It is relatively clutter-free and does not involve several technical aspects associated with equity or mutual fund investment. It means that banks and most other well-known lenders offer fixed deposit schemes. Given the plethora of options available, it is imperative to understand everything associated with it.
This article discusses the basics and things to look for while choosing a suitable fixed deposit scheme.
What is a fixed deposit (FD)?
As the name suggests, a fixed deposit comes with a fixed tenure. It refers to an investment vehicle that banks and other financial lenders provide. In this arrangement, the borrower invests money for a fixed term and a fixed return.
FDs are lucrative because they offer a higher return than a regular savings account. The returns go up further if the investor is a senior citizen. You can go short-term (12 months) or choose to stay invested for the long-term (up to 60 months). The tenure and the principal amount decide the interest that the lender offers you.
Even though your funds are in a lock-in state until maturity, lenders offer premature withdrawal for specific emergencies. But they also charge a penalty for the same.
Types
Here are the types of fixed deposit schemes available –
Cumulative fixed deposit
A Cumulative FD offers compounding benefits to its holders. Here, you get both the accumulated interest and principal on maturity. Instead of paying the interest to you periodically, the lender reinvests it. It enables you to earn interest on interest. A cumulative fixed deposit is feasible for those who are not looking for periodic payouts from their investments.
Non-cumulative fixed deposit
A Non-cumulative FD is a regular income scheme that gives the investor the option to choose their interest payout period. Here, instead of reinvesting the interest amount, the lender transfers it to you. It means that the total interest-earning is significantly lower than the cumulative FD option. The non-cumulative fixed deposit option is feasible for senior citizens and other individuals looking to generate periodic cash returns from their investment.
Pros
Here is why we consider FDs as an ideal investment instrument -
- It is a safe & secure investment option and comes with minimal risk
- It comes with fixed income devoid of market volatility
- It has a fixed tenure and offers a rollover facility
- You can use it as collateral during an emergency and get up to 90% of the investment amount as advance
- It also lets you choose your interest payout frequency
Cons
Like any other investment vehicle, fixed deposit plans do have their share of disadvantages –
- It is a debt instrument. So investors get a lower return than equity investments.
- The interest income is taxable.
- The lenders charge a penalty on premature withdrawal.
How to choose the right fixed deposit plan for yourself?
Choosing a suitable fixed deposit plan depends on several factors. Look for a lender offering you a plan that suffices most of your needs.
Here are the factors to keep in mind while choosing the right fixed deposit for yourself -
1. Interest rate:
The interest rate for fixed deposits varies from one lender to another. Most private lenders are happy to pay a higher rate than banks and other financial institutions. At Shriram Finance, we offer one of the best rates in the industry across plans.
2. Interest rate for senior citizen:
It is imperative to understand that a fixed deposit doubles down as a regular income scheme for senior citizens. Lenders understand the same too and therefore offer higher rates to older people compared to other individual investors. So it is crucial if you are a senior citizen yourself or are opening an FD on their behalf, you ought to check the applicable rates on offer.
3. Minimum FD investment:
There is no ceiling for FD plans, but lenders usually have a floor limit. In most cases, the lowest amount that you would need for an FD would be ₹ 5,000. Use our FD calculator to understand more about how your investment value can affect your interest earnings.
4. Tenure:
The FD tenure refers to your propensity to keep your funds in a lock-in state. Choosing the optimum tenure will ensure higher returns and gives you the leeway to plan your other investments around it. At SFUC, we offer flexible options ranging between 12 and 60 months.
5. Auto-renewal facility:
Most lenders offer auto-renewal or rollover facilities to the borrowers. It enables them to reinvest the maturity amount into an FD with similar terms and tenure. This facility ensures that you do not lose out on interest earnings. Alternatively, you can inform your lender that you would like to encash it on maturity.
6. Premature withdrawal facility:
Emergency, primarily financial, can hit us anytime. Most lenders do not offer withdrawal within three months of the fixed deposit opening date. But they allow premature withdrawal (complete or partial) from your FD account after charging you a penalty. So you must check the terms while opening the account.
7. Interest payout frequency:
The interest payout frequency option is available only for those choosing a non-cumulative fixed deposit. Cumulative fixed deposit holders get the accumulated interest on maturity along with the principal. Lenders offer monthly, quarterly, annual, and full tenure interest payout options to the holders while opening the FD account.
8. Nomination facility:
Most people prefer long term fixed deposits. With life being so uncertain, most lenders offer a nomination facility that helps you choose the right person to acquire the funds (either on the day of your demise or on maturity). You can enter the requisite nominee details in your account opening receipt.
Taxability of interest from fixed deposits
The FD interest income is tax deductible if it exceeds ₹ 10,000 in a financial year. So the lender will forward you the sum after deducting TDS on it. The tax deduction depends on your income tax slab. If you are below all the brackets, you will have to file Form 15G or 15H with the lender. It will ensure that they do not deduct TDS while paying you the requisite sum.
Wrap up
We have summed up all the things that you need to consider while choosing the right one for yourself.
At Shriram Finance, we understand the importance of fixed deposit as an investment. So we have curated plans, keeping in mind the flexibility you seek and offering you more than you expect. The process is hassle-free, and we require minimal documentation.
Click here to explore our fixed deposit plans.
Fixed deposits are one of the safest & secure investment options available to an investor. That is why they are the number one savings option that comes to an individual’s mind.
