How to Invest in Fixed Deposit

Many people treat bank fixed deposits (FDs) as the safest location to keep their savings. This is partly due to the fact that, for the majority of investors, the safety of the principle invested still ranks first, overriding other aspects like interest rate, liquidity, and post-tax return.

However, instead of being seen as a way to build long-term wealth, FDs should primarily be seen as a place to deposit money with the intention of maintaining the capital.

Interest rates

Different banks and tenures will have different interest rates. The interest rate will be established once a deposit is made and will last until maturity. In comparison to other commercial banks, new banks and even some small finance banks could provide greater interest rates. Number of the duration, all banks provide senior persons a higher interest rate. The FD Advice certificate will be printed with the interest rate, term, investment amount, and maturity amount.

Choice of tenure

Deposits can be made for as little as seven days or as long as ten years. A better strategy to control interest rate risk and offer liquidity to funds is to 'ladder' deposits over time. Divide your money among 1- to 3-year fixed-rate deposits rather than, example, locking it up in a 1-year account. Continue the process as and when the individual FDs mature, starting with the shortest-term FD, and renew it for the long term.

Choosing frequency of interest payments

One may choose to choose for monthly, quarterly, half-yearly, or annual interest payments depending on their needs. Reinvestment mode is an alternative if someone doesn't require a steady income. In the latter, interest is paid at maturity together with the invested principle and is reinvested after quarterly compounding.

Premature withdrawal of deposit

If the fixed deposit is closed before the initial term has expired, interest will be paid at the rate in effect on the deposit date for the time the deposit has been held by the bank. On the day of the deposit, the bank may have set a penal rate of interest that would apply to the deposit. Most banks charge a 1 percent penalty on the applicable rate for such early withdrawals, including rout and partial withdrawals.

Taxability

A bank FD's interest rate is entirely taxed. A 7.25 percent return equates to a 5 percent after-tax return for someone in the top income bracket. The taxation works as follows: For a bank FD with a 7.5% interest rate, the post-tax returns for the 5%, 20%, and 30% tax rates come out to be 7.5%, 5.94%, and 5.16%, respectively. Additionally, for a bank FD, interest generated (across branches) over Rs 10,000 per year will be subject to TDS of 10% (unless form 15 G/H is submitted). So, before you invest in an FD, pay attention to the post-tax return.

Additionally, everyone can use bank FDs to save emergency funds that can be accessible in a matter of days, particularly sweep-in deposits. Such deposits can be included in one's emergency fund, along with investments in short-term mutual funds.

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