Getting a fix on fixed deposits

The uncertainty in the stock markets has ensured that investors are busy scouting for safe havens to park their funds. One such option is bank fixed deposits (FDs). While the nature of this instrument is very simple because there is a fixed rate of interest offered for a specific period of time, investors should keep some other factors in mind before investing in FDs.

First, though most investors just look at the interest rate being offered, it is important to gauge the financial strength of the bank. And it is especially important if you are investing more than Rs 1 lakh because any deposits up to this amount is insured.

In the past, there have been bad experiences when several cooperative banks gathered funds by offering exceptionally high interest rates and failed to pay back their investors. However, in India, such cases are far and few. On the whole, banks have a strong capital structure and, hence, selecting from among the public and private sector scheduled banks should not pose a problem.

Second, the period of the deposit is vital. Often a higher rate of return is available for specific time maturities like 10 per cent for 360 days or 9.5 per cent for 400 days and so on. In such a situation, selecting the right period for the deposit will be crucial. If there is an expectation that the rates will fall in the near future, investors will be better off by locking themselves in a longer-term deposit.

Third, the amount is important. In most cases, if the deposit is above Rs 15 lakh, the bank offers a special rate, which is higher than the normal rate. In such circumstances, sometimes it makes sense to consolidate the investments and earn a higher rate of return. However, in some other cases, it might make greater sense to break up the total amount into smaller deposits and spread it across various periods. For instance, if an investor has Rs 1 lakh, he could divide it into – Rs 50,000 for 3 years, Rs 35,000 for 500 days and the remaining Rs 15,000 for a one-year deposit to garner the maximum returns, along with reduced tax liability.

Fourth, since there can be quite a bit of difference in various rates of interest being offered, it’s important to read the fine print. It’s important to consider the rate of return per annum instead of a flat figure. That is, if there is a deposit for 270 days, where the rate is 10 per cent per annum, the actual amount earned in absolute terms is 7.5 per cent. Similarly, if there is a deposit for 300 days, where the return is 8 per cent, then the per annum return is 9.6 per cent. Such details are very important and the investor will do well to consider these figures rather than just rush towards the highest figure.

There are other additional factors that are involved with a deposit that also need to be considered. In some cases, there is a higher rate for senior citizens as well as employees and channelling the deposit through this route will be beneficial for the investor. Also, sometimes there might be an insurance cover available along with the FD and several other banking facilities like opening a bank account. Take advantage of all these factors when investing in the FD.

The writer is a certified financial planner