Tips for investing in Fixed deposit

Fixed deposit is one of the safest investment instrument for people in India. It has far better interest rates than a savings account but also carries the safety of a savings account. Apart from this, fixed deposits also provide the flexibility of planning your investment by providing the facility to choose the tenure beforehand. A fixed deposit can easily be opened in any bank at your nearest branch. It is the first choice investment option for those who do not want to risk their earning in other investment options like stocks and mutual funds.

At present, interest rates on fixed deposits are running at high but it is also hinted that the interest rates cycle could soon very well turn. That is why it may be a good time to invest your earnings or extra money in Fixed deposits and lock on to high-interest rate before the interest cycle turns. Some key points you must consider while investing in Fixed deposits are:

1. Split your money: Future is uncertain, you might want to invest your money at present but after 7-8 month or a year you might need some funds. Thus, it is better to split your money in fixed deposits with different banks so that when you require some funds you won’t have to break the entire FD and pay a pre-mature penalty on the whole amount. Instead, you can break FD only for the amount you need and pay penalty on that amount only, while the rest of your money continues to grow in other deposits.

2. Compare before investing: Even when you are looking to invest in low-risk instruments you would want to opt for the highest interest paying option. That is why comparing different rates offered by different banks and chose the banks and financial institutions who are offering higher interest rates.

3. Chose different tenures: Interest rates vary with the amount and tenure of fixed deposits. Choosing different tenures for your multiple deposits will give the much-needed liquidity and also the option to reinvest your money to balance the effect of changing interest rates over a period of time.

4. Re-invest Interest on FD: You also have the option to re-invest the interest earned on your deposits, doing so increases your principal amount thus, increasing the interest amount as well.

5. Tax on Fixed Deposits: Another important point to consider is that interest earned on fixed deposits is taxable. You need to include the interest earned in your total income which is calculated for the purpose of determining tax liability as per the income tax slab you fall in. When the interest earned in a year is more than Rs. 10,000 banks deduct TDS @ 10.3%.

6. Premature Withdrawals: In case you opt to break your FD then you will have to incur premature penalty charges. In addition, the rate of interest will also come down taking into consideration the amount and tenure for which it covered. Thus, opt for pre-mature withdrawals only in case of an emergency.

Following the above-stated tips will surely help you invest your surplus funds in a profitable manner in a fixed deposit. At present, people who are looking to invest in low-risk high return instruments, a fixed deposit is the perfect option for them.

Related article: How To Get Best Returns On Fixed Deposit

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Written by Divya Kapoor

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