Factors that you must consider before you invest in an FD

Factors that you must consider before you invest in an FD

For a long time, Fixed Deposits or FDs have been the preferred choice for Indian households. For one, FD rates are more attractive than what you can get on a savings account in a bank. In fact, you can just use a simple and plain vanilla FD calculator to figure out how much your money would earn and grow to with the interest amount. Don’t always be lured by high FD interest rates. Many of the small banks and cooperative banks may be offering much higher rates of interest, but you must prefer the sounder banks to park you FDs.

The best method of selecting the right fixed deposit is to compare the best FD rates and then take decision. Remember your fixed deposit investment is not just about returns but also about liquidity and security. Hence you must make your choice judiciously. Today, the process is a lot simpler. You can open and operate an FD online and most of the required actions can happen in auto mode.

Twelve questions to ask before zero in and invest in an FD?

Fixed Deposits are one of the easiest investments and also highly valued for loans and other purposes. There is no option to knowledge and the best is to know the nuances of an FD, so that you make the right decision. Here are 12 questions you must ask yourself before finalizing your FD investment. Of course, for simplicity, we will leave out NBFC FDs and corporate FDs and only stick to bank FDs. After all, there is no point comparing apples and oranges.

  1. The first thing you need to do is a comparative study of the interest rates. Normally, the SBI FDs are taken as the benchmark for their rates across tenures. Other major banks build FD rates around this benchmark. Many of the smaller banks and cooperative offer much higher rates of interest, but they come at a higher risk. So, make a judicious choice of where you want to open your FD. Let it be a stable scheduled bank. Today, banks have the leeway to fix their own interest rates on Fixed Deposits. However, these rates are often comparable. Ideally, you should trust a reputed bank that offers a competitive rate for your investment. It is your hard earned money after all.
  2. How much better rates does the bank offer to senior citizens above the age of 65? Normally, the senior citizens are offered a slightly higher Fixed Deposit interest rates as compared to regular investors. For longer tenures, the premium for senior citizens ranges from 40 bps to 60 bps on an average. If you are a senior citizen or looking at FD for your parents, then this is an important consideration as there are different FD benefits for senior citizen.
  3. Make a choice of the tenure of the FD. If you need the funds in 1 year, don’t go for a 3 year FD. Let  the tenure of your FD match with when you need the funds. Otherwise you will end up with a maturity mismatch. In fact, you have tenures ranging from 7 days to 10 years, but long term tax saving FDs have a lock in of 5 years and they also are not eligible for loan against FDs. Ideally, look to stay invested through the tenure of the FD. Higher the FD tenure, normally the interest rate also escalates.
  4. Check out the periodicity of payment of interest. The rates will reduce if you take more frequent payments. There are monthly, quarterly, half yearly, annually and cumulative interest payment options. Normally, the preferred tenure is one year, but you can take a choice based on what you want the flow for and the periodicity you need. 
  5. Most of the FDs would insist on a minimum balance. For most of the top banks today, they allow you to open FD for as little as Rs10,000. However, if you are opening an FD account for a minor, the minimum balance can be as low as Rs2,000. Mostly, FDs don’t have any upper limits for investment.
  6. Check out if the FD has a loan facility attached to it and what are the terms. Normally, the bank where you have the FD will also give you a loan facility of up to 85% to 90% of the value of FD at any point of time. The procedure is simple. Ideally, there is a cost to the loan against FD, but the interest will continue to be paid to you. The interest rate on FDs is normally around 1.5% to 2% above the FD interest rate. Being a back to back secured loan, the rate of interest are quite low on this product. You can avoid breaking an FD in an emergency.
  7. Is there a premature withdrawal penalty on the FD. Most FDs have a withdrawal penalty stipulated. Most FDs these days come with one option to withdraw early at a specific date. However, there would still be a penalty and administrative cost you need to bear. Normally, breaking the FD is not a good idea before maturity and should be ideally held till maturity. For emergency needs, a loan against FD is a much better option.
  8. Ideally, prefer an FD with an auto renewal facility. This saves you the hassles of remembering the dates of renewal and other details. The auto renewal is a mandate wherein you can automatically get your FD renewed without hassles of remembering the date. Prefer such a facility. Most banks offer FD auto renewal facility. With the help of this facility, your principal amount, as well as the accrued interest, is re-invested for a duration of your choice. This is mentioned in the FD receipt itself.
  9. Check if the FD also has an in-built nomination facility. Normally, when you open an FD account, you will also be mandatorily required to choose a nominee. Such a nominee can be a relative or even a minor. In the event of your unexpected demise during the FD tenure, your nominee will receive the FD amount. The details of the selected nominee are also mentioned on the FD receipt.
  10. Work out the TDS declaration well in advance. Normally, if the interest is over Rs40,000 per year for regular FDs (Rs50,000 for senior citizens), there is TDS at 10%. However, in case you don’t fall under the taxable ambit, you can give Form 15G or Form 15H, as the case may be. That way, no TDS is deducted from your bank interest. Make sure that your declaration is updated in the bank records, so no TDS is deducted from your FD interest.
  11. Check if the FD has the sweep-in facility. The sweep-in works like an overdraft wherein the FD can be used to get a line of credit or OD against the FD. This is very useful if you have issued cheques and there is a risk that one of the cheques may bounce. In such cases, you can just use the sweep in facility to save the hassles.
  12. Check if the bank has an online FD facility. This is part of the internet banking facility wherein you get to open FDs, withdraw FDs and also get a loan against FDs online itself. You don’t need to visit the branch and go through all the waiting hassles. Such a facility can add a lot of value to you.

So, next time before selecting the FD, make a checklist of the above 12 factors. That can make your FD journey smoother.