Keen to invest in bank FDs? Follow these steps to get best out of your fixed deposits
Fixed deposits are always considered a safe bet when it comes to savings. Our parents and grandparents have instilled this investment heuristic in us for generations. Many consider the fixed deposits an investment that does not require any deep analysis and assured gain even if these gains are low when compared to other investment options.
Here are some tips or pointers that need to be considered before investing in fixed deposits.
1. Credit health of financial institution
Before investing with any bank or NBFC check its credit history. That is, how secure the banks financial situation is. Contrary to belief it is not 100% guaranteed that the money invested in fixed deposits can be retrieved from the financial institution as promised.
This is because financial institutions invest your fixed deposits into schemes where they make money and pay back investors at the time of tenure with interest. If their schemes do not pan out they cannot say they will not pay back the customer. Thus, it is very important to know the credit history of the financial institution.
2. Interest rate
The interest rate which determines your return on investment should also be thoroughly researched. You shouldn't go with the bank which gives the highest interest rate.
You need to consider their credit history as big financial institutions know they are providing guaranteed returns. It is the smaller institutions who offer the higher interest rates. So here again analysis is required.
3. After-tax return
Know what the after-tax returns are. The interest rate is considered as an income thus when you get the interest it comes under your taxable income at the time of tax filing. The higher the tax slab you belong to the more tax on the interest you need to pay. Check if you feel this return is profitable for you.
4. Payout frequency
Financial institutions offer the investor multiple options for payment of interest, i.e. monthly, quarterly, half yearly, yearly or at the time of maturity, this depends on the persons need.
For example, a person looking to diversify his/her earnings will ask for quarterly payment which they may invest in mutual funds or any other instrument. (or) if you are a pensioner, you will prefer to be paid monthly like a stipend to meet monthly financial needs.
The tenure also depends on the investors requirement. In India, any fixed deposit below 5 years is not exempt from tax. If your need is to go for tax exemption then you need a fixed deposit of 5 years. Only the principle is exempt from tax, the interest earned is still part of taxable income.
Know if there are any penalties in foreclosing a fixed deposit. There is a lock-in period for most fixed deposits before which it cannot be closed.
If the liquidity of funds is important for you then it is best to go for a short term fixed deposit, i.e. less than 3 years.
From above we can see that fixed deposits are not just about fixed rate of interest or fixed tenure. Like all financial instruments or investments, it needs careful planning and analysis to get the best out of it.