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All investors are advised to keep some portion of their savings in bank fixed deposits depending on their risk profile and goals. You can also leverage a bank deposit by taking a loan against it. Let us look at why FDs are a must for a retail investor
Safe and secure
Fixed deposits or term deposits is one of the most secure investments. The principal is protected as it is guaranteed. On maturity the depositor will get the principal plus the interest earned during the tenure of the deposit.
Even in case of default by the bank, which may happen in the rarest of cases, you are assured of getting back any deposit up to Rs 1 lakh. Bank deposits are guaranteed by the Deposit Insurance and Credit Guarantee Corporation.
Assured returns
FDs are fixed income products and they give assured returns. Once the money is deposited, the bank has to pay the interest rate agreed at the start. Interest is paid on a quarterly basis.
Even if interest rates fall before the deposit matures, returns will not decrease. So, depositors know exactly how much they will get when the deposit matures at the time of locking into the deposit. Similarly, if interest rates rise during the maturity, returns will not increase. But banks will give the option of breaking the deposit before maturity and re-investing in a new deposit at higher rates.
Interest rates vary according to the tenure of the deposit. Typically banks offer the highest rate for deposits of one-year duration.
Currently banks are offering 7.75-9.4% on FDs of one to three years' duration.
Choose tenure according to requirement
The tenure for a FD can range from as one month to 10 years. You can choose the tenure depending on your needs and goals.
Easy to redeem
FDs are easy to redeem. If you are in need of money you can break your deposit before maturity subject to a penalty. The penalty could be 50-100 basis points lower than the contracted interest rate
Loan against FD
A FD can also be used to take loan. You can get up to 90% of the deposit amount as loan. The interest rate for the loan is usually 50 to 200 basis points higher than the rate on the FD. So, it works out cheaper than a personal loan. The loan is given in the form of an overdraft so the money deposited will continue to earn interest.
