Definition of Fixed Deposit
Whenever there is a little money in your bank account, what do you do?. If you don’t invest that money in equity or mutual fund. Then maybe you make an FD of that money. Which we also call Fixed Deposit. And a lot of investors like you and I Without thinking make an FD somewhere. Only thinking that I want to park that money somewhere. Here, investors like you, and I make a very big mistake. That we only consider an FD as a parking space for our money. We don’t consider FD an investment option. In this article, we will talk about How you can make Fixed Deposit an investment option. And what are the things you have to keep in mind which will help you choose a very good FD? Which is the coming time can give you very good returns.
A wealth report of Karvy had come out in 2019. In which they said that India’s individual wealth will increase by 2024 and become 799 lakh crores. This means from 2019 until 2024 it will increase by a 13.7% CAGR. Apart from this if I tell you another interesting fact that if you invest Rs 100 in India then currently, a Rs 60 investment is made in financial assets. Financial assets like equity, mutual funds, FD. There are a lot of assets like this. And just a Rs 40 investment is made in non-financial assets till now, which we also call physical assets. But according to this report in 2024, this 60% number will increase to become 66%. So here in the case of financial assets. Now also there is going to be good growth in the coming few years.
5 important points in Fixed Deposit
If I talk about FD which we also call the Fixed Deposit. Until now, in 2019 there is 46 lakh crore worth of investments here. And in the overall financial assets, this gives a 17.5% contribution. Now I will talk about those 5 points Which if you pay attention to them. You can choose a good FD Which in the coming time can give you a good return.
First important points interest rate in Fixed Deposit
And a very common point for retail investors like you and me, Which is the interest rate. Whenever we make an FD in a bank, we first see what the interest rate is. And if I talk about interest rate Then it varies a lot from one bank to another. In some banks, we get a 6% interest rate. In some places, we get 7%. And in some places, we also get an interest rate of 8-8.5%. And here if I talk about senior citizens, then normally senior citizens get a 0.5-1% extra interest rate.
If I talk about some big banks like HDFC Bank, ICICI bank PNB, SBI, and apart from that Kotak Mahindra bank. Then big banks on a one year FD normally give you a return between 6-7%, Which we also call interest rate. But nowadays there are new categories of banks Which normally give us a little more returns on FDs. Like small finance banks. Small finance banks normally give you more returns on FDs as compared to big banks. Because the portfolios of small finance banks are very diversified. And the loans they give it to the people of low-income range. Because of which they charge a very high-interest rate. And there, they are able to charge a high-interest rate. And that is why they give you a high-interest rate on your FD.
Higher interest rate of small finance banks
And apart from that, the small finance banks are now in an expansion mode. And nowadays are thinking of acquiring a lot of customers. Because of which they give you a slightly higher interest rate. Some small finance banks that give you around an 8% interest rate, Like DCB bank, Ujjivan small finance bank. Apart from these, there are a lot of small finance banks that give you a slightly higher return As compared to other banks.
Also, there are certain companies that we call NBFC Which can give you a slightly higher interest rate. But the small risk of investing in NBFC is that there, your default risk slightly increases. Like we have seen in the history of independent India, that no bank has defaulted until now. So there your security is a lot. So where you have a lower risk, then your interest rate is also slightly lower. And as you start to take higher risks, You get a higher interest rate.
So if you don’t think that you should take a higher risk in the case of FD, then you should not think much about investing in NBFC. And you should invest more in the case of normal banks. And if you want a higher return, then you can invest in small finance banks. Because there the risk is not as much as in the case of NBFC. And it is not as less as in the case of big banks.
The second important points are the Tenure of the Fixed Deposit
The second factor that you should look at while investing in an FD, is the tenure of the FD. For how long are you thinking of investing. Like you can invest in an FD for one month. You can invest for 5 years, and ten years also. And the tenure is inter-linked with your interest rate. Because as your tenure increases, the bank gives you a higher interest rate. If on a one-year FD you only get a 7% interest rate. In that way on a three-year FD, you can get a 7.5% interest rate.
If I talk about a ten-year FD There, your interest rate in some banks can go to 8.5%. So the first thing you have to see is What is the time and tenure that you want to make your FD for. According to that, you have to choose which bank is giving you a good interest rate. And when both of these things match then you should think about making an FD in that bank.
The third factor is of compound interest in Fixed Deposit
The FD you have invested in, how does it do compounding? I give you a small example. In the case of simple interest, if you invested 100 rupees and you have a 10% return. Then after one year, you will get a Rs 10 return. And even the next year you will get a Rs 10 return. But here in compound interest, in the first year, you make an investment of Rs 100 and the compounding interest you get is 10% per annum. Then your return in the first year was Rs 10.
And the return you get in the second year won’t be on Rs100. But it will be Rs 110. Because of that, your return in the second year will increase from Rs 10 and become Rs 11. So before making an FD you should see how frequently your bank gives you compounding. If a bank gives you a compounding return quarterly, which means after 4 months you will get your compounded return. And after 4 months you will start getting interested in that interest. And some banks give you compounding quarterly, Some banks give you compounding half-yearly, and some banks give you compounding annually. So here it is very important you have to compare your compounding period with your interest rate.
A small example,
that some banks told you That in our bank you will get an 8% return. But we will compound annually. But another bank told you, that we will give you a 7.5% interest rate. They will compound quarterly, then the second option will be more beneficial. If you’re thinking about investing for a longer horizon. So here it is very important for you to interlink these three things and look at it.
The fourth important point is flexibility in Fixed Deposit
How flexible is that place where you’re planning on opening an FD? Now, what does flexibility mean? The first thing that comes under flexibility is what is the minimum amount you have to keep in an FD. Because some banks say that the minimum amount is Rs 5000. And some banks say that the minimum amount should be Rs 50,000. So you should see according to you which FD is most flexible for you. Which FD is right according to your amount. And the second and very important part of flexibility is Premature withdrawal. How fast you can remove your money from there.
Because it is possible that at once you have made an FD for five years. But in between in one or two years an emergency can come up, that you have to break your FD and remove your money from there. And a lot of banks here charge you a certain amount of penalty. The penalty can vary from 0.5-1%. So you should pay a lot of attention here that you have made an FD at a place where the penalty is 1%. So in between, if you withdraw prematurely, then it is possible that your return is impacted a lot and that return can be impacted even by 1%. Now, wherever you think of making an FD. You should look at 4 things
- The returns you get there
- What its tenure is
- What the compounding is
And in flexibility, it is very important that you should see What its premature conditions are. How many penalties they charge.
After that only you should decide where you should make your FD. And inflexibility I will tell you another very important thing That a lot of times it can happen that you have made an FD for five or ten years and in between, you need a little money.
An example that consider,
you have made an FD of 10 lakhs for 10 years. And after two or three years you need 1 lakh rupees. So here it is very difficult for you to break the entire FD. So here if you get this flexibility option that against that FD you can get a small loan. That can fulfill your short-term requirement and you don’t have to break the FD. So we call this loan against FD. So a lot of banks give you an option to take a loan against your FD, with which you can fulfill your requirements. And you won’t have to break your overall FD.
So here you get two benefits. First, your short term requirement is complete. And the long term return that you’re going to get from the FD, that also doesn’t get spoiled. So under flexibility, you should also see whether that bank gives you a loan against FD or not. So there if you have the option of loan against FD available, then you can give that preference.
The fifth important point is tax pay
This is an extremely important point that we sometimes miss. What are the taxes we have to pay, when we invest in FD? So here there are two points,
first what is the tax you have to pay?
And second, by investing in FD what are the taxes you can save. So, like I always tell you that if you invest anywhere under 80C then you can reduce your taxable amount. If you invest in an FD and there you get a five-year lock-in, then you can do your tax deduction under 80C. So if you’re planning on making an FD somewhere and if you haven’t made an investment under 80C. Then you can take advantage of that in FD. So if you think about investing anywhere in the coming time. And if you haven’t taken a tax deduction under 80C, then you should take the benefit of that and you should go and see whether that facility is available or not.
Now I will come to the second part of tax That
if I earn interest on an FD then how much tax do I have to pay? So on an FD, the tax you pay is according to your tax bracket. And a lot of times these banks cut this tax in the form of TDS. Which means tax deduction happens at the source.
A simple example
How much tax will you have to pay. Now consider that you made an FD On which, in one year you got 1 lakh rupees interest. So if you come in the 30% tax slab, then you will have to give Rs 30,000 tax to the government. And there are a lot of chances that it will get cut in your TDS itself. If it is not cut, and more is cut. So when you file for income tax then you can get a refund on that. And if lesser is cut, then you will have to pay it later. So I tell you how you can choose a good FD. And whenever you invest in an FD. Then don’t just understand this as a parking space, understand it as an investment. And very carefully, by paying attention to these five things, choose a good FD.
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Inflation is also a major factor
Apart from this, while investing in an FD, you must have heard the term inflation. Before Inflation tells us how much our expenses have increased. And according to that how much the value of our money has decreased. Now consider that inflation in our country is 4%. And the place where you have invested, there the return is lesser than 4%. Then your actual invested money is going down, not up. So from now if you invest in any FD or any investment option, then you should keep in mind that the return you are getting Should at least beat the inflation. If it doesn’t beat the inflation, then that isn’t an investment, instead, your money is going down.