Fixed Deposit: 5 key things to look at while investing in FDs
Did you know that in some countries the interest rate on fixed deposits fetch as low as 0.5 to 2 per cent, and in some countries even fetch negative returns? Negative return, in this case, means you have to pay the bank to keep money with them in an FD account. However, in India, FD currently fetches interest rates ranging from 7 to 7.50 per cent for tenures between 1 and 10 years. No wonder, bank fixed deposits are one of the most preferable and popular deposit schemes in India.
Other than the interest rate offered on FDs, the popularity of this deposit scheme is also because of the safe and secure nature of the investment. When you invest in an FD, the principal amount is invested at a fixed interest rate and you gain interest on your deposits, which accrues and grows over time. Also in 2018, FDs gave a better return than real estate, mutual funds, and equity.
FD comes with a wide range of tenures; you can choose from as low as 7 days up to 10 years. While choosing a bank to open an FD account, select the lender who is offering the highest interest rates, as higher fixed deposit rates can get you higher maturity amount. However, bank FDs also comes with some issues. For instance, premature withdrawals are not allowed or come with a penalty. Also, if you want to re-invest when extra funds are available, it is generally at a lesser interest rate (if the rates are in the declining trend).
Hence, if you are planning to open a fixed deposit account, take a look at these few factors, which you must consider while comparing the FDs available in the market.
1. The credibility of the FD provider: An important aspect while choosing an FD provider is the credibility of the bank. Even though bank FDs are secure under the depositor insurance program by DICGC, only an amount of Rs 1 lakh is insured under this. Experts suggest to get a better idea, investors can also refer to the credit rating of a bank. Also, instead of putting all your money in one FD, you can break the investment amount into different banks to reduce your dependence.
2. Interest offered: Based on the tenure you chose, banks offer different interest rates which also vary from bank to bank. It also depends on the age of the depositor (which is different for senior citizens). While the interest rate typically ranges from 5.75 per cent to 7.50 per cent in a year, bulk/lumpsum deposits attract a higher rate of interest. Interest offered to senior citizens are 0.5 per cent higher than the regular rates offered by banks. For the entire tenure of investment, the FD interest rate remains the same.
Latest FD interest rates of 5 banks
| Banks | FD Rates | Tenure |
|---|---|---|
| SBI | 5.75% – 7.00% | 7 days to 10 years |
| Bajaj Finserv | 8.00% – 8.60% | 12 months to 60 months |
| HDFC Bank | 3.50% – 7.40% | 7 days to 10 years |
| ICICI Bank | 4.00% – 7.50% | 7 days to 10 years |
| Axis Bank | 3.50% – 7.30% | 7 days to 10 years |
Source: bank websites
3. Cumulative vs Non-Cumulative FD: With a cumulative FD, you can re-invest the interest earned on a regular interval. This way you get the compounding benefits and the accumulated interest is received at maturity/ at the end of the tenure. However, in the case of a non-cumulative FD, the interest is credited in the account at a regular interval, either monthly or yearly.
The interest rate in a cumulative fixed deposit is typically compounded quarterly and re-invested with the principal. Hence, cumulative FDs are suitable when you are investing to achieve a long-term goal. Non-cumulative FDs, on the other hand, are generally suitable for retired investors and pensioners who require interest income to meet their day-to-day expenses.
4. Loan against FD: Investing in an FD comes with a loan facility that investors can opt for, which is one of the major benefits of this deposit scheme. During any financial emergency, investors can avail loans against FDs, up to 90 per cent of their own deposit. You can avail loan up to a maximum tenure of your deposit scheme, as the maximum tenure is restricted up to the maximum tenure of the FD.
Banks usually charge interest at 0.5 per cent to 2 per cent above the applicable FD interest rate on loans against FDs. For instance, SBI offers loans against FDs at the rate of 6.25 to 7.25 per cent. While choosing the bank, compare and opt for the bank that offers you the lowest spread over the FD rate.
5. Premature withdrawal: Investors have to pay a penalty if they wish to liquidate their FD investment before the end of the tenure. The penalty is usually charged by lowering the applicable interest rate by 0.5 per cent to 1 per cent by banks. Some banks also allow investors to break their FDs prematurely without penalty, given they re-invest the fund with the same bank on other FD products with a longer tenure. The penalty charge levied on investors varies from bank to bank. Hence, while selecting an FD product, look for banks that impose a low penalty on premature withdrawals.