A fixed deposit is a great option to save a part of your funds. It provides a steady interest stream and can be a lot safer than equity investments or mutual funds. However, when choosing the financial institution in which to make the deposit, carefully consider some important factors.
Choosing the Right Bank or Organisation
You can safely open an FD account with any PSU or large private sector bank. You can also open an FD account. Many corporates also invite fixed deposits at attractive interest rates, to raise funds for operations.
However, don’t decide where to invest based solely on the rate of interest offered on your deposit. It is one of the important considerations, but there are other details you need to look at.
Public and private sector banks operate under the control and supervision of the Reserve Bank of India. They have to comply with the rules and regulations of the RBI, and cannot default on payments.
However, if you opt for a corporate FD, they’re not regulated by the RBI, and you undertake a substantial amount of risk. Corporate FD might offer higher interest rates, but the safety of your money depends on the company’s financial stability.
Fees and Charges
If you decide to close an FD before the maturity period, your bank may levy a penalty of up to 1% interest on the amount. That is if the bank offers 7% interest on your deposit, and you withdraw the amount before time, you will only realise 6% interest on the deposit up to the date of withdrawal.
Interest Earnings and Tax
If the total interest you earn on your FD is above Rs.10,000 per annum, it will be taxed. Calculate the tax you have to pay on the interest earnings and subtract it from the total annual interest earned to see if the FD is a worthwhile investment.
If you have other sources of income, choose to reinvest your interest on the FD, to earn more. The next interest calculation will be on your principal along with the interest from the previous FD. Use a fixed deposit interest calculator facility to arrive at terms that fit your needs
Fixed deposits of up to Rs.1 lakh are exempted from taxation under Section 80C. However, the deposit term has to be for 5 years and you cannot withdraw the money before term. Consider the drawbacks of this and invest only if you are looking for ways to save on income tax.
Corporate Fixed Deposits
Corporate fixed deposit schemes are created to enable the company to raise funds at a lower rate of interest. To attract investors, the corporates offer high-interest rates. However, carefully consider the company in which you invest your money. Many companies take this route when banks and lending institutions reject them.
However, not all corporate FDs are dubious. Credit rating agencies like CRISIL review these companies and provide ratings to serve as a guide to potential investors. Choose a company that has, at least, an AA rating or above.
When you are looking for a financial organisation to open an FD, consider all the above points before you make a decision. It is a safe investment option, but your investment may not yield high returns. For that, you may need to augment your fixed deposits with investments in other schemes like SIPs and mutual funds.