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Invest in cumulative FDs when planning your retirement

BIG CORPUS: You can opt to renew your FD to benefit from power of compounding and earn additional interest

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Retirement is on the way. And how your finances stack up by the time you retire will go a long way in determining how you will spend the rest of your retirement years. Many of us approach retirement ill-prepared. It thus becomes imperative for people to start investing young in the right financial tool to build a suitable retirement corpus. 

The presence of mutual funds (MFs), equities and other financial tools while balancing the risks and returns in the portfolio sets forth rewarding returns. However, the portfolio is incomplete without investing in fixed deposit (FD).

FDs with flexible tenor and higher returns, periodic pay outs are few key features of a good investment enabling depositors an interruptible availability of liquidity. Unlike other financial products, fixed deposit, irrespective of the market situation, brings assured returns. When planned and executed properly, fixed deposit possess the capability in allowing investors to glide through retirement years.  

Things to keeps in mind while investing in FDs:

Choose right partner 

FDs are offered by many banks and NBFC’s offering higher interest rates with flexible investment tenors. However, it is important to ascertain the credit ratings of the financial institution. Credit rating firms such as Icra and Crisil rates the company basis on the debt repayment capacity of the issuer alongside their fund holding and their credibility in the market. The accreditation by these credit rating firms indicates the highest safety and lowest investment risk on the FD.

Selecting right option

FDs are categorised in the form of cumulative and non-cumulative FDs. In cumulative FD, interest is compounded every quarter or year and paid at the time of maturity. Unlike, non-cumulative FD offers interest to be paid out monthly, quarterly, half-yearly or annually, as per the investor’s choice. Cumulative FD is an efficient way to create wealth over a period of time. Since the interest gets added to the principal investors, with the power of money getting compounded, investors end up building a strong corpus. This feature becomes especially relevant for investors looking to build a retirement corpus.

Specific intervals 

FD matures at a specified period, meaning the time frame of returns can be ascertained before. With this feature, investors can buy FD at different intervals of life with different tenor, keeping in mind their future life milestones. This will allow liquidity at different points to meet post-retirement goals. 

Further, depositors can use the FD interest calculator to ascertain the maturity amount beforehand. This eventually will help to structure investments at a specific period and assign specific investment goals to them.

For additional interest

To benefit from the power of compounding and to earn additional interest, investors can opt to renew their FD. The interest amount gets added to the principal amount which ultimately gets reinvested. FD offers additional interest rates benefits, while renewing the FD. 

Withdraw wisely

FD is a traditional financial product that has withstood the test of time and therefore, still very popular and relevant amongst the Indian households. It is recommended to avoid withdrawing earnings before maturity as the depositor may incur penalty apart from reducing the total earnings out of it. In case the situation makes it necessary to withdraw the deposit, depositors can always opt to take a loan against the deposit. This may serve the multiple purposes of liquidity without liquidating the saving. 

Convenience of online

FD can be purchased either by visiting the financial institution or by simply making an online application. FDs of today are offered without lengthy documentation process and facilitate smooth payments options. Some institutions offer senior citizens a higher interest rate than the younger age groups. Any investment made is required to be in sync with the financial objectives and fixed deposits are no exception to it.

Taxability on FDs

The interest earned from FDs is taxable. The tax deducted at source on fixed deposit can range from 0% to 30%, depending on the income tax bracket of the investor. Financiers deduct 10% TDS if your interest earned is more than Rs 10,000 in a year, if the PAN details are available with them. However, in case the PAN details are not provided, 20% TDS will be deducted.

MULTIPLIER EFFECT

  • Financers are offering a higher rate of interest in FD to help in building a strong corpus
     
  • Use FD Interest calculator to ascertain the maturity amount beforehand

The writer is business head of retail and corporate liabilities at Bajaj Finance

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