Good financial planning is at the heart of financial independence. A portion of your portfolio must be invested in stable instruments to get you through the tests of life. Fixed Deposits (FDs) are commonly considered part of the fixed-income component of a portfolio, as they offer predetermined returns for a defined tenure, subject to terms and conditions. Several financial institutions offer fixed deposit schemes at competitive interest rates. You must choose a fixed deposit scheme that aligns with your investment strategy and money goals. Let's look at an extensive guide to help you choose an FD with the steady interest rates on offer.
What is a Fixed Deposit?
A fixed deposit is an investment facility offered by NBFCs, financial institutions complying with the RBI regulations. You invest a lump sum amount for a specific tenure at an interest rate agreed upon at the time of booking. The principal amount remains locked in for a defined period.
How to Choose a Fixed Deposit Scheme
Step 1: Define Your Financial Goal
Before comparing FD schemes, clarify:
- Why you are investing (short-term goal, emergency fund, retirement income, etc.)
- The amount you want to invest
- The time horizon
- Whether you require periodic income or maturity payout
Clear goals help determine the appropriate tenure and payout structure.
Step 2: Compare Interest Rates Carefully
While you research for the appropriate investment option, make sure that you make an interest rate comparison. With the rising concerns of inflation, money must grow for you. Your regular salary income might not be able to handle all your financial commitments in the future. Hence, salary or business income must be combined with interest income from a fixed deposit.
Step 3: Select the Appropriate Tenure
FDs are available for varying durations depending on the institution. Choosing a tenure aligned with your goal reduces the likelihood of premature withdrawal, which may attract a penalty and impact overall returns. Interest rates are fixed at the time of booking and remain applicable for the selected tenure, subject to scheme conditions.
Step 4: Check the Credit Rating of the Issuer
When you get in business with another entity, you conduct a thorough background check, also called due diligence, to ensure that the agreement works out smoothly without any risk of default. Similarly, you must conduct a background check of the financial institution providing the fixed deposit facility. Agencies like ICRA and India Ratings rate financial institutions as per their pre-defined criteria.
Step 5: Decide Between Cumulative and Non-Cumulative Options
A cumulative fixed deposit is the typical type of fixed deposit where the amount deposited stays locked in for the agreed-upon tenure. The significant benefit of this type of instrument is that your effective cumulative fixed deposit interest rate increases because of compounding. Compounding means earning interest on interest.
A non-cumulative fixed deposit is the opposite of a cumulative fixed deposit. If you want your hard-earned money to be invested while getting regular payouts to meet recurring expenses, such an FD would be the ideal investment choice. The payouts will happen at regular intervals, depending upon the period you select - monthly, quarterly, half-yearly or even yearly.
Parting thoughts
If you follow a systematic process and consider the pointers mentioned above, your search will become easier. Remember, your decision might have long-term consequences and might affect your financial freedom in the future. Therefore, it would help if you took a well-researched decision.