As banks have hiked interest rates after RBI's decision to raise the repo rate to 4.90 per cent in two tranches, it is wise to invest in FDs.
Fixed deposits (FD) are considered trusted financial investments that reduce the adverse effects of market volatility on your savings. As FDs have a flexible tenor, the investor can comfortably plan his/her short to mid-term goals. They are also considered an easy investment option as the eligibility criteria, and the investment process is much easier than other investment methods.
As banks have hiked interest rates after the central bank's decision to raise the repo rate to 4.90 per cent in two tranches, it is wise to invest in tax-saving FDs.
Despite the ease of investing in an FD, it is crucial to note certain things before leaping. Here are some aspects to research before investing in any FD.
1. Check payout modes
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While most of us pay close attention to the interest rates on FD, we often ignore considering multiple payout options. These options decide if you will get your interest at the time of maturity or periodically. This depends upon the type of FD you pick.
If you wish to get steady returns on the FD every month, you should opt for the non-cumulative FD to get monthly interest. If you are investing for a bigger future goal, you can go for a cumulative FD.
2. Use FD calculator
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Before making any blind investments, it is best to check the best offering in the market. As banks and NBFCs offer fixed deposits at different rates, comparing offerings from other sources is best. An FD calculator can become quite handy in these circumstances.
3. Check interest income taxation
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It is important to note that interest income earned from both NSC and tax-saving bank FD is taxable. This is because it is counted in the list of 'Income from other sources'. Due to this, the interest income remains taxable, and the actual return on FD or NSC is relatively low.
4. Research about FD laddering
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Those who wish to get a high return on FD amid rising interest rates must consider the option of FD laddering. It is always best to plan your strategy by distributing the lumpsum fund into various FDs that offer multiple maturities. This way, you will not have to time your rate cycles.
5. Check floating FDs
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Many lenders offer floating-rate fixed deposits to their customers. While the interest rate on floating FDs can be less than the current fixed rate FD, they prove beneficial when you don't wish to switch old short-term FDs to higher FDs.
6. Check the credibility of the FD provider
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Before deciding to make any FD investment, it is crucial to check the lender's credibility. You can check the lender's credit rating to make an informed decision. Besides this, you can also split your investment amount into multiple banks to reduce your dependence on a single investment.
7. Penalty for premature withdrawal
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While most people invest in FDs with long-term objectives, some might have to liquidate their investments before the end of the tenure in emergency cases. Certain banks permit customers to break their FDs prematurely without penalty if they reinvest their savings with the same bank again.
As an investor, it is crucial to check the penalty charges that will be implied in case of premature liquidation of an FD.
If you wish to invest wisely, make sure you keep a check on the things mentioned in the above list. Notably, financial decisions should always be made smartly.
