There are different types of investment avenues available in India. Some offer market-linked returns with equity-oriented investments, while others offer predictable returns immune to volatility.
Ramesh was considering investing his savings in an avenue but was confused about which one to choose. While equity offered him the potential of attractive returns, he was hesitant about the volatility risks involved with it. Similarly, with the available fixed-income avenues, Ramesh was unsure of the long-term investment horizon associated with many options.
As Ramesh was looking for a solution, his friend, Suresh, advised him to opt for a fixed deposit plan. Suresh also outlined the aspects and benefits of the deposit so that all of Ramesh’s investment-related problems can be tackled. Let’s understand what Suresh detailed.
Key Highlights
- Fixed deposits are fixed-income investment avenues wherein you invest a lump sum amount for a chosen tenure and earn predictable returns.
- Fixed deposits are suitable investment avenues as they solve the various problems that other investments might have.
- Fixed deposits are relatively stable and do not carry any volatility risks. You get predictable returns and can also choose a flexible fixed deposit plan based on your financial goals.
What is a Fixed Deposit Plan?
A Fixed Deposit (FD) is a straightforward investment option where you deposit a lump sum amount with the financial institution for a chosen tenure. In return, you earn a pre-determined interest rate that remains unchanged throughout the deposit period — offering predictable returns on your savings.
Fixed Deposits: One Solution to Five Different Financial Problems
Suresh also educated Ramesh about how fixed deposits can solve the different problems that other investment avenues have.
Problem 1: Volatility Risk
Volatility risk is the risk of falling or negative returns when the markets turn volatile. For instance, if you invest in equity and the market falls, you might incur negative returns. Moreover, you can also lose out on the capital invested if the value of the equity investment falls.
Solution: Fixed Deposits Do Not Have Volatility Risks
When it comes to fixed deposits, volatility risk is low to moderate. Fixed deposits do not offer market-linked returns. The interest rate is fixed, and you get predictable returns even if the markets turn volatile.
Shriram Finance offers fixed deposit plans with high credit ratings. They are rated "CARE AAA; Stable” by CARE Ratings; “Crisil AA+/Watch Positive” by CRISIL Ratings Limited; [ICRA]AA+ (Stable)" by ICRA & "IND AA+/Stable" by India Ratings and Research.
Problem 2: Flexibility in Investments
Ramesh was looking for an investment avenue that gave him the choice to choose his investment tenure and amount. He wanted flexibility to plan his investments based on his financial needs.
Solution: Fixed Deposits Offer Flexibility
With a fixed deposit plan, you can choose how much you want to invest and for how long. This helps you choose a suitable amount and tenure depending on your needs. For instance, if you want to save up to buy a car the next year, you can choose a 12 to 18-month short tenure. On the other hand, if you create a corpus for your child’s higher education after a few years, you can choose a long-term deposit tenure going up to 60 months.
Problem 3: Goal-Based Savings
Investors look for avenues that would help them save for their financial goals. Earmarking an investment for a particular goal helps in getting the funds when you need them to fulfil the said goal.
Solution: Fixed Deposits Come in Two Variants to Match Your Goals
Two types of fixed deposit plans are available to help you plan and save per your financial goals. A cumulative fixed deposit plan would be suitable if you want a lump sum corpus for making a down payment on a home or a car. The plan reinvests the interest earned over the deposit tenure, giving a lump sum corpus on maturity.
On the other hand, if you want to receive a regular income to fund your expenses after retirement or to supplement your monthly income, you can choose non-cumulative fixed deposit plans. Under these plans, the interest income is paid during the deposit tenure. You can choose the payout frequency of monthly, quarterly, half-yearly and yearly and receive regular income.
Problem 4: Liquidity
Liquidity means converting your investment to cash when you need funds for any pressing financial need. Under many investment avenues, liquidity is a concern since your investment is locked in for a specified period, and you cannot convert it into cash at short notice.
Solution: Fixed Deposit Laddering
The problem of liquidity can be addressed with fixed deposit laddering. FD laddering is a strategy where, instead of putting all your money into a single Fixed Deposit, you split it across multiple FDs with different maturities — say 1 year, 2 years, and so on. As each FD matures, you reinvest that amount into a new long-tenure FD, keeping the "ladder" rolling forward.
The key benefits are liquidity (you always have an FD maturing soon if you need funds), rate flexibility (you're not locked into one rate forever — each renewal captures the prevailing rate), and compounding over time.
Problem 5: Affordability
With some investment avenues, affordability becomes problematic since they require considerable investment amounts. For instance, if you want to buy property or invest in gold, you must spend considerable money.
Solution: Fixed Deposits Are Affordable
Fixed deposit investments are very affordable. The minimum deposit amount is low, so small investors can easily invest within their budgets. For instance, Shriram Finance Fixed Deposits start from as low as ₹5000.
The Bottom Line
Besides offering the aforementioned benefits and solutions, fixed deposits are also easy to invest in. You can invest online or offline and open an FD quickly. Senior citizens also enjoy an additional rate of return, making fixed deposits a popular investment choice among them.
So, fixed deposits can be the right answer if you are looking for a one-stop investment solution. To choose a lucrative plan, opt for Shriram Finance Fixed Deposits. FDs offer flexible terms, allowing investors to choose tenures from 12 to 60 months, making it easier to align investments with financial goals. Additionally, many financial institutions provide additional interest rates for senior citizens and women depositors, enhancing the appeal of fixed deposits as a relatively stable investment option.
FAQs
1. How does a Fixed Deposit help address different financial goals with consistent, predictable returns?
A Fixed Deposit plan offers a pre-determined interest rate that remains unchanged throughout your chosen tenure — regardless of market conditions. When equity-oriented investments experience volatile performance, an FD can bring balance to your overall portfolio by providing returns that are not linked to market movements.
2. Are there specific tips or strategies for maximising the benefits of a Fixed Deposit?
To maximise the benefits of a fixed deposit plan, here are some tips that you can follow:
- Invest in a better-rated fixed deposit plan for capital guarantee
- Choose a plan with a competitive interest rate to earn better investment returns.
- Avoid premature withdrawals as they incur penalties and reduce the overall interest earnings.
- Choose a cumulative fixed deposit plan to enjoy the benefit of compounding returns and accumulate a larger corpus.
3. What role does financial planning play in making the most of a Fixed Deposit for diverse financial needs?
Financial planning is the basis of investing in a fixed deposit plan for diverse financial needs. It helps you choose the right investment amount and tenure for the deposit. The ideal investment amount helps you accumulate the desired corpus for your financial goals. The right tenure ensures that you get the funds when you need them.