7 Tips on How to Invest in High Interest Fixed Deposits

Most Indians are familiar with the term “Fixed Deposit”. A Fixed Deposit (FD) is one of the most popular financial instruments among investors in India as it provides a higher rate of interest than a regular savings account, but is low risk at the same time. It is considered one of the safest forms of investments. Here are some of the features of a fixed deposit:

a. Easy to open with simple documentation

b. The rate of interest depends on the amount deposited, the tenure and the issuing bank/NBFC/Corporate and typically ranges from 4%–8% per annum. (Do note that these rates can change anytime.)  

c. Money cannot be withdrawn from an FD account before maturity, except on payment of a penalty.

d. Once the deposit matures, the bank credits the original amount along with the interest earned to the bank account specified when the FD is opened.

Additional Reading: Investments with Tax Benefits

Looking to invest in a Fixed Deposit Account? Following are some tips.

1. Shop around

Different bank offer different interest rates on their Fixed Deposit. Look around to find which bank pays good interest rates for the amount and tenure you wish to invest.

2. Split your money

Say, for instance, you have saved up Rs. 4 lakh to invest, it would be wiser to split it into 4-5 FD accounts across different banks. The advantage here is that if you need the money in case of an emergency, you needn’t break the entire deposit. You just have to pay the premature withdrawal penalty for the amount that you require, even as the rest of your money keeps multiplying.

Spreading your investments across different banks controls penalty amount you must pay, if you ever need to break the fixed deposit.

3. Opt for multiple FD accounts-with different tenures

The interest rate of a fixed deposit is calculated in terms of the repo rate—which means that the interest rate could potentially fluctuate during the period of your FD. You can counter this problem by building a nest of fixed deposits which have different tenures.

4. Tax liability on FDs

While investing in an FD, keep in mind that the interest earned is taxable in line with the income bracket you belong to, unlike certain other kinds of investments. You can opt for a tax saver scheme detailed below. 

5. Tax Saving FSD

While there are Tax Saving FD’s available, it comes with a lock in period of 5 years. You wouldn’t be allowed to break the deposit before that. Consider these circumstances before investing in an FD. If you think that you would like the flexibility of breaking a deposit, then do not opt for such schemes. Also remember that if the deposit is encashed before maturity, the amounts held under this instrument do not qualify for tax deductions.

6. Premature withdrawals attract penalty

Breaking a fixed deposit before the maturity date often ( though not always) attracts penalty charges. Withdrawing from an FD account may be essential if you urgently require the funds for an emergency. In such cases the bank will allow partial / premature withdrawal of the deposit before completion of the period of the deposit, up on payment of a penalty. The interest payout is also affected, depending on the how long the remaining maturity period is.

Addtional Reading: What is a Fixed Deposit and a Recurring Deposit?

7. Reinvestment of Interest

In this scheme, the bank will reinvest the interest accumulated in your Fixed Deposit account, which allows the principal amount to increase. The total amount—including interest earned—is paid out at the time of maturity. If your financial goal is the growth of your money, rather than a periodic income from the interest every month or quarterly, then opting for the compounding option is the best bet.