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What is the Importance of a Fixed Deposit on Your Financial Portfolio?

Posted: 23rd October, 2021

Updated: 8th February, 2023

Written by -

eye

Ace Cricketer Rahul Dravid was "The Wall" and "Mr. Dependable" of Indian Cricket. Do you know why?

You could trust Dravid to display consistent performance in the face of challenging game situations. He stood like a wall and safeguarded the team, often turning around the result of a cricket match.

Similarly, a fixed deposit is a stable and consistent investment. Hence, it can be the axis around which you build your financial portfolio. This article covers all that you need to know about a fixed deposit investment. But let us start by learning a bit about a financial portfolio.


What is a Financial Portfolio?

A financial portfolio is the combination of your investments in both equity and debt-based securities. Such diversification of your investments reduces the overall risk and generates a relatively stable return. While Mutual Fund investments can give growth potential to your money with equity exposure, fixed deposits can stabilize your portfolio.

However, the allocation of funds between these investment instruments depends solely on your risk appetite and financial goals. Once you build your portfolio, it is crucial to focus on investment portfolio management. It simply means to regularly analyze the market and replace non-profitable investments with profitable ones.


How can I Build My Financial Portfolio?

When you build your financial portfolio, you must ensure that you make investments according to your requirements. Here are the factors that you should consider.

  1. 1. Financial Goals:

You should first define the financial goals for which you wish to invest. They can be short-term, medium-term, or long-term. You may want to save and invest for buying a car or a house, for children’s education, travelling, emergency funds, marriage, or simply wealth creation.

  1. 2. Risk appetite:

Market risks are the major concern for an investor. Your risk appetite refers to the losses that you can afford to sustain in case of unfortunate events. It also depends on your financial goals. For example, if your goals are short-term, your risk appetite is very low.

  1. 3. Time:

The tenure for which you invest your money is another important factor. Your risk appetite and financial goals are directly affected by time. Let us take an example.

Suppose you want to buy a car worth Rs. 8 Lakhs after three years. Assuming the fixed deposit interest rates to be 5% p.a., you need to invest almost Rs. 7 Lakhs now. Similarly, if you had six years for the same goal, your initial corpus reduces to less than Rs. 6 Lakhs.


Why Should You Include Fixed Deposits in Your Investment Portfolio?

If you are involved in a full-time job and do not get time to build your investment portfolio, you can ask an investment portfolio manager to do the job on your behalf. This feature is the primary benefit of a Mutual Fund investment.

On the other hand, if you want to include fixed deposits into your portfolio, here are the reasons why you should do so.

  1. 1. To Balance out your Portfolio Risk:

Fixed Deposit investments carry the least amount of risk. They not only provide consistent returns, but DICGC (Deposit Insurance & Credit Guarantee Corporation) also provides insurance cover of Rs. 5 Lakhs per bank or NBFC to every investor.

  1. 2. Fixed Returns on Maturity:

Unlike equity investments, a fixed deposit provides a sure-shot return on investment. Therefore, you know the exact amount of earnings at the end of the FD tenure, at the beginning itself. Hence, you can formulate absolute goal-based planning with fixed deposit investments.

  1. 3. Fixed Deposits are the best for short-term goals:

When you plan for a short-term goal, your risk tolerance ability is negligible. Hence, you need assured returns. Fixed deposits are the perfect match for this situation.

You can invest in fixed deposits for a tenure of 7 days to 10 Years. A flexible term helps you to avoid unnecessary charges on early withdrawals.

  1. 4. The benefit of Compounded Returns:

Fixed Deposits provide compounding benefits. As a result, you can reinvest the accrued interest along with the initial principal amount. So, you earn interest on interest or cascading interest. Let us understand it using the following example.

Suppose you invest Rs. 5 Lakhs for 10 years @ 7.75% p.a. Now, if calculated using simple interest, the total interest amounts to Rs. 3,87,500. Alternatively, the below table shows the interest amount under compound interest.

Year Opening Principal Interest @ 7.75% Closing Principal
2021 ₹ 500,000.00 ₹ 38,750.00 ₹ 538,750.00
2022 ₹ 538,750.00 ₹ 41,753.13 ₹ 580,503.13
2023 ₹ 580,503.13 ₹ 44,988.99 ₹ 625,492.12
2024 ₹ 625,492.12 ₹ 48,475.64 ₹ 673,967.76
2025 ₹ 673,967.76 ₹ 52,232.50 ₹ 726,200.26
2026 ₹ 726,200.26 ₹ 56,280.52 ₹ 782,480.78
2027 ₹ 782,480.78 ₹ 60,642.26 ₹ 843,123.04
2028 ₹ 843,123.04 ₹ 65,342.04 ₹ 908,465.07
2029 ₹ 908,465.07 ₹ 70,406.04 ₹ 978,871.12
2030 ₹ 978,871.12 ₹ 75,862.51 ₹ 1,054,733.63
2031 ₹ 1,054,733.63 ₹ 81,741.86 ₹ 1,136,475.48
Total Interest Earned in 10 Years ₹ 636,475.48

In the table, you must have easily observed that the interest earned under compound interest is almost 1.65 times that under simple interest. Hence, your actual interest rate comes to nearly 12.73%.


Why Shriram Finance Online Investment Portfolio?

Consequently, there is a perception shift in investors towards NBFCs. NBFCs provide much higher FD interests as compared to banks.

Shriram Finance Limited has been a leading and trusted NBFC in India since 1986. Shriram Finance provides interest rate of up to 9.05%* p.a. which is inclusive of the additional interest benefit of 0.50%* p.a. for senior citizens and 0.10%* p.a. for women depositors.

Click Here to invest your FD at the best interest rate in India.

Growth of Fixed Deposits: Calculating Maturity Amount for Withdrawal
Growth of Fixed Deposits: Calculating Maturity Amount for Withdrawal
Calculating Yield Rates from Fixed Deposits
Calculating Yield Rates from Fixed Deposits