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Take the Fixed Deposits route for secure and steady investments

Fixed Deposits (FDs) may not appear to be as glamorous as equity investments, but they are no pushover either. Like the tortoise in the fable, the safe and steady fixed deposits are more likely to end up winning the race, especially if you are hoping to meet your short term financial goals.

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Fixed Deposits (FDs) may not appear to be as glamorous as equity investments, but they are no pushover either. Like the tortoise in the fable, the safe and steady fixed deposits are more likely to end up winning the race, especially if you are hoping to meet your short term financial goals.

``FDs are most suitable for very short to short-term fund requirements. For such a short period, equity and other risky investments are not appropriate,'' says Arvind Rao, chartered accountant. This is because, as an asset class, the fixed deposit is the most loyal of all investments. It gives assured returns and also ensures capital protection, making it the ideal investment option for those with a low risk appetite.

The client's goal is the deciding factor when it comes to choosing where to invest. ``If the client's financial goal is to be realised over the next two to three years, then a fixed deposit is a better investment option,'' says Gaurav Mashruwala, financial planner. Not surprisingly, FDs are the first choice for most retirees, senior citizens and others who prefer a steady income.

Following the changes in the tax laws announced in the July 2014 interim budget, FDs are now on par with debt mutual funds in terms of taxation, if the latter is held for less than 36 months. Considering that debt mutual funds do not give assured returns, FDs are a better investment option as they give assured returns. ``It may be a good idea to lock your funds at the current interest rates,'' points out Mashruwala.

The challenge is to select the right FD that offers both safety as well as a good interest rate. Most corporate FDs fetch a higher interest rate than bank FDs. ``The current yields are in the range of 9% to 11% per annum and these are higher than Bank FDs, Fixed Maturity Plans (FMPs) as well as highly rated bonds,'' says Mr Anil Chopra, group CEO and director, Bajaj Capital.

But interest rate should not be the only criteria for investing in FDs. Keep in mind that safety is the primary goal. Make sure to invest in FDs of either the top notch banks or companies. One may end up losing their capital if they invest in FDs of companies with shaky financials.

``Just for a 100 or 200 basis points more, it is not worth risking your capital,'' says financial advisor, Gaurav Mashruwalla. Back of the envelope calculations show that a 3% higher interest rate works out to about Rs 3000 more on an investment of Rs one lakh. After taxes, the amount would be further reduced to approximately Rs 2000 per year, which works out to about Rs 200 per month. ``Why take tension for an additional Rs 200 per month?'' points out Mashruwala.

``Investors must take due precaution before investing in FDs of companies. Important factors to be considered are credit rating, which should be AA or higher, reputation of promoters and previous track record. It is advisable that not more than 10% of net worth should be invested in FD schemes of any single company,'' advises Chopra.

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