It would be a rare family in India that has not invested in fixed deposits or FDs at some stage or the other. For marketing executive Mukesh Sharma, it was just an excuse to start saving part of his salary, which was otherwise getting spent without a trace being left at the end of the month.
Home maker Sushila Pradhan started putting money aside in FDs a month after her daughter Priya was born, planning for her marriage. Business man Vikas Patel started investing in FDs with the goal of creating a corpus for his son’s higher education abroad. They have also been used as a retirement planning avenue for generations.
Many families have a system of starting a recurring deposit (RD) account with the bank for two or three years. When it matures, the amount collected gets put into a fixed deposit.
Using this cycle, they manage to create a series of FDs that will mature at two-three year intervals. These are again re-invested so that when there is a big expense, like a wedding in the family or a medical emergency, large funds are available.
Banks also facilitate this with the facility of automatic renewal of FDs where the customers do give new instructions for the matured deposit. On the date of maturity, such deposits are renewed for a similar term as that of the original deposit at the rate prevailing on the date of renewal.
The reason why FDs are preferred is that they are considered to be very safe investments. Plus, FDs are simple enough for even the most naive investor to grasp the basic principles. From the annual Diwali bonus or a sudden financial windfall like winning a chit fund, the idea is to put aside an ‘extra’ lump sum for the future, rather than spend it all.
Moreover, while banks can refuse to repay FDs before the expiry of the deposit, they generally don’t observe this as a hard and fast rule. Premature withdrawal is allowed with interest paid at the rate applicable at the time of withdrawal.
They can charge a penalty for premature withdrawal as well.
Additional services to FD holders such as loans against FD certificates at competitive interest rates are also provided.
Flexi Fixed Deposits (a combination of demand deposit and fixed deposit) are an option specifically tailored for those who do not want to commit entirely themselves for a long-term period.
So should you invest in FDs in the current scenario or not? The analysts at PersonalFN, a Mumbai based financial planning and mutual fund research firm, opined that given the tight liquidity situation, investors have a chance to earn higher returns on their fixed deposits with banks.
They of the view that investors should take advantage of the prevailing situation and even consider investing in fixed deposits. However, investors shouldn’t over commit and follow their personalised asset allocation. Don’t forget, any rise in crude oil prices at international level would again give rise to higher inflation in the domestic economy. But fixed deposits, especially the short term ones certainly have started looking attractive again, they point out.