When it comes to investing, term deposits or fixed deposits are the preferred choice. The fact that investing in fixed deposits has no risk and offer good returns makes it the first choice for most of us.
Most banks be it public or private operating in the country offer you the option of opening a fixed deposit account with them. You can choose to open a FD account for period that ranges between 7 days to 10 years with the rate of return going up to 8% p.a. Senior citizens are offered additional interest by banks for opening a FD account. The additional rate of return offered varies from bank to bank.
It needs to be mentioned here that in 2018, FDs offered better returns when compared to mutual funds, equity, and real estate.
While the prime factor that we check for before investing in fixed deposits is the rate of interest offered, there are certain other things which needs to be checked. Here, we have listed a few factors that needs to be considered before deciding to invest money in FDs. Read on to know more about it.
- Offered interest rates: As mentioned earlier, the interest rates offered by banks on FDs is the foremost thing that needs to be considered. A higher interest rate enables you to avail good returns at the end of the tenure. As such, comparing the offered interest rates with other banks can come in handy before deciding to start an FD account with a particular bank.
- Premature withdrawal facility: The second thing to consider is whether the bank provides the facility of premature withdrawal. This is an important thing because many banks operating in the country charge you a penalty for premature withdrawal of the deposited amount. Choosing a bank which charges less penalty when it comes to premature withdrawal can prove to be beneficial as it doesn’t eat into the earned amount.
- Facility to avail loan against the FD: You can avail a loan against the FD account opened with a particular bank. If you are looking to avail a loan against the FD account, you can consider opening it with a bank that lets you avail a higher loan against the FD account.
Example: In case, you open a FD account of 2 lakhs it is beneficial to open it with a bank that lets you avail a loan up to 90% of the deposit amount rather than a bank which offers 75%.
- 90% of Rs.2 lakh – Rs.1,80,000/-
- 75% of Rs.2 lakh – Rs.1,50,000/-
- Credibility of the bank: Another thing to consider is the credibility of the bank. While certain banks can promise you a very high rate of return as compared to the existing rates in the market, there is no guarantee of it. In case, you are willing to invest your hard earned money in a FD with a bank you are not familiar with, refer to its credit rating before investing.
- Compounding benefits: You need to check for the compounding benefits before investing in a term deposit. There are two types of fixed deposits – cumulative and non-cumulative.
Under cumulative FDs, interest is compounded quarterly and you have the option of reinvesting the earned interest. The accumulated interest on the FD is paid to you at the end of the deposit tenure. In non-cumulative FDs, interest is credited either on a monthly or yearly basis.
In case, you are looking forward to invest in fixed deposits, make sure to consider the factors mentioned above. They will come in handy in the long run, if you do go ahead and invest in a FD.