10 Factors to Consider While Choosing a Fixed Deposit Scheme

Fixed deposits (FDs) are a popular and secure investment option for those looking to safeguard their capital while earning a fixed interest over time. However, with several financial institutions offering various types of FD schemes, it can be challenging to pick the right one for your needs. Whether you are a new investor or someone looking to diversify your financial portfolio, choosing the best fixed deposit scheme requires careful consideration. In this article, we will walk you through ten essential factors to consider when selecting a fixed deposit scheme.

1. Interest Rates

The primary reason most people opt for fixed deposits is the guaranteed return in the form of interest. However, interest rates can vary significantly across different banks and financial institutions. When choosing an FD scheme, it’s crucial to compare interest rates. Some banks may offer higher interest rates for senior citizens or for longer tenure deposits. While a higher interest rate may seem attractive, always make sure to consider the institution’s credibility alongside.

How to Compare Interest Rates

Banks and NBFCs (Non-Banking Financial Companies) often revise their interest rates based on the current market conditions. Checking their official websites or using comparison tools available on financial portals can help you compare interest rates efficiently.

2. Tenure of the Deposit

Fixed deposits come with different tenures, ranging from as short as 7 days to as long as 10 years. The tenure you choose will directly impact the interest rate and the total return on your investment. Typically, longer-term FDs offer higher interest rates, but they may also lock your money for an extended period. Therefore, it's essential to align the FD tenure with your financial goals.

Short-Term vs Long-Term FDs

• Short-term FDs are ideal if you need liquidity and want to avoid tying up your money for too long.
• Long-term FDs are beneficial if you're looking for higher interest and have no immediate need for the funds.

3. Credibility of the Financial Institution

While higher interest rates may seem appealing, the safety of your investment should be a top priority. Always check the credibility and reliability of the financial institution offering the FD scheme. Public sector banks and reputable private sector banks generally offer safer FD options compared to lesser-known NBFCs or small finance banks.

Why Credibility Matters

Investing in a credible institution ensures that your capital is safe and that you will receive your returns without any risk of defaults. Check the bank’s credit ratings from agencies like CRISIL, ICRA, or CARE to get an idea of its financial health.

4. Premature Withdrawal Options

Life is unpredictable, and you may need to break your FD before its maturity due to a financial emergency. Different banks and financial institutions have varying policies regarding premature withdrawals. Some may allow you to break the FD with a penalty, while others may not permit it at all.

Penalties for Premature Withdrawal

Always check the penalty clauses and terms regarding premature withdrawals. Usually, institutions charge a small percentage of the interest accrued or reduce the interest rate if you withdraw the amount before maturity.

5. Tax Implications

The interest earned on fixed deposits is taxable, and this can significantly impact your overall returns. While some FDs like tax-saving FDs come with tax benefits, most regular fixed deposits do not offer any tax exemptions. Understanding the tax implications before investing is crucial.

Tax-Saving FDs

Tax-saving fixed deposits offer tax deductions under Section 80C of the Income Tax Act, but they come with a lock-in period of 5 years. However, the interest received during this period is tax payable. For those in higher tax brackets, this could eat into their profits, so it's important to weigh the tax benefits against the liquidity constraints.

6. Minimum Deposit Amount

Different banks have different requirements regarding the minimum deposit for a fixed deposit scheme. Some banks may allow you to open an FD with as little as ₹1,000, while others may require a significantly larger initial amount. Consider your budget and financial flexibility when selecting an FD scheme.

Finding the Right Fit

Choose an FD scheme that matches your savings capacity. If you plan to invest small amounts regularly, you might want to opt for a scheme with a lower minimum deposit requirement.

7. Interest Payout Frequency

FDs offer flexibility in terms of how and when you can receive interest. The options typically include monthly, quarterly, half-yearly, or yearly interest payouts. Alternatively, you can opt for a cumulative FD where the interest is reinvested and paid out at the time of maturity.

Cumulative vs Non-Cumulative FDs

• Cumulative FDs: Interest is compounded and paid out at maturity, making them ideal for those who don’t need regular payouts and want to maximize returns.
• Non-cumulative FDs: Interest is paid out at regular intervals - monthly, quarterly, half-yearly and yearly, which is perfect for people looking for a steady income stream.

8. Auto-Renewal Option

Many banks offer an auto-renewal facility for fixed deposits. This means that when your FD matures, it will automatically be renewed for the same tenure at the prevailing interest rate, unless you give specific instructions otherwise.

Should You Opt for Auto-Renewal?

While auto-renewal can be convenient, always check the new interest rates before allowing your FD to renew. Sometimes, the rates at the time of renewal may not be as favorable as when you initially invested.

9. Additional Benefits for Senior Citizens

Senior citizens often enjoy preferential treatment when it comes to fixed deposits. Most banks offer an additional 0.25% to 0.75% interest rate for senior citizen FD schemes. Additionally, some banks may waive off penalties for premature withdrawal for senior citizens or offer better payout options.

Why Senior Citizens Should Opt for Specialized FDs

Higher interest rates coupled with flexible withdrawal policies make senior citizen FD schemes a great option for retirees looking for stable and predictable income.

10. Loan against FD

In case of a financial emergency, breaking your FD is not always the best option. Many financial institutions allow you to take a loan against your FD, usually at a rate lower than a personal loan. This feature ensures liquidity without compromising the interest you earn on the FD.

Benefits of Loan against FD

Taking a loan against your FD can be a better option than opting for high-interest loans like personal loans or credit card debt. Additionally, since your FD remains intact, you continue earning interest while using the loaned amount for your needs.

Conclusion

Fixed deposits are one of the most reliable investment avenues for those seeking guaranteed returns and capital protection. However, selecting the right FD scheme requires careful evaluation of various factors such as interest rates, tenure, credibility of the institution, and the flexibility of withdrawal. By keeping these 10 factors in mind, you can choose an FD that best aligns with your financial goals and risk appetite. 

FAQs

1. 1. What is the maximum tenure for a fixed deposit?
      • The maximum tenure for an FD varies by institution but typically ranges up to 10 years.
   2. Can I break my FD prematurely?
      • Yes, but you may have to pay a penalty or forgo a portion of the interest.
   3. Do senior citizens get special benefits for FDs?
      • Yes, senior citizens often receive higher interest rates and more flexible withdrawal options.
   4. Is the interest earned on FDs taxable?
      • Yes, the interest earned is taxable based on your income tax slab.
   5. What is the minimum amount required to open an FD?
      • The minimum deposit amount varies across institutions and can be as low as ₹1,000.