Fixed deposits (FDs) and recurring deposits (RDs) are considered staid investments preferred by senior persons looking for assured returns and are not exactly hot favourites of financial advisors. But the smart and savvy person can use these instruments to plan his expenses and savings better.
Fixed deposits (FDs) and recurring deposits (RDs) are considered staid investments preferred by senior persons looking for assured returns and are not exactly hot favourites of financial advisors. But the smart and savvy person can use these instruments to plan his expenses and savings better.
If used with proper planning and discipline, you can reduce your big-ticket expenses into bite-sized expenses. Chartered accountant Shilpa Ambre uses the FD and RD route to provide for most of her big-ticket expenses. Thus, she has started RDs and FDs for creating funds that would be used to meet investment expenses such as insurance premium as well as other expenses like taxes, child's tution fees, etc.
These are in addition to the monthly systematic investment plans (SIPs) for mutual fund investments.
"This method helps me to spread the costs over the year. It ensures that I do not burn a big hole in my pocket in any particular month,'' explains Ambre.
What's more, all this calls for very little effort, except in the initial stages. Firstly and the most important task is to plan and budget ones income and expenses for the year. Plan your investments and calculate the amount of funds required and when it will be required. After opening the required accounts in the banks, you need to give the necessary standing instructions to the bank to deduct the funds accordingly.
You can now relax as you are automatically creating the corpus of funds needed for your various expenses or investments throughout the year. On maturity, collect the money and invest or use for the pre-decided purpose.
``This is a way of amortising expenses on a monthly basis. It also gives a true picture of your monthly savings,'' says Arvind Rao, a chartered accountant.
The fiscal discipline helps to use your funds in a more systematic manner, giving you peace of mind. Most persons who do not plan their investments and taxes in advance end up with major deductions in their salaries in the last three months of the year.
Besides, the alerts by banks help to remind you of making the investments or the payments in time. Thus, you end up saving on late payment charges.
"The added bonus is that you are earning interests on the deposits,'' add informed sources. Interest earned can be anything from 5-9% depending on the period and the amount.
Interestingly, Ambre uses the RDs even for planning birthday gifts for family. Not surprisingly, she surprised her husband with a car one birthday and a lavish party another year. "I keep separate FDs for each occasion. The maturity of the FDs is timed two weeks or a month before the occasion,'' she says.
"Unlike debt funds, FDs and RDs can offer assured returns. Besides, debt funds have a three year lock-in period,'' points out Rao.
"This method of using time deposits to fund various needs can also be used by persons who have irregular incomes. For instance, a person with an irregular income can break up a part of the income into FDs of varying periods and use the same as a regular income,'' sources said.
Say if a person has a variable income of Rs 5 lakh in one month and no income is expected in the next few months. He or she should use the income to create FDs of say Rs 50,000 or Rs one lakh for periods of varying maturity. These can be used for monthly expenses on maturity.
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