Investing in Bank Fixed Deposits: Six Things to Consider
A fixed deposit is an excellent way for an investor to make money with minimum risk. If you choose the right bank and the right term deposit, you can make a profit without losing your principal.
Here are the 6 important things to look before investing in a fixed deposit.
1. The Importance of a Bank’s Reputation
A Bank can promise anything. But without a reputation to back up such promises, you are taking a risk by investing in such a bank. So investigate a bank’s reputation and the products they offer.
Compare the interest rates of different banks and research about the consistency of the banks in delivering the interest rates. And most important of all, investigate if the bank is solvent.
To protect yourself, make sure that the deposits are insured by the Deposit Insurance and Credit Guarantee Corporation.
2. Interest Rates
We know that interest rates are boring. But make sure you understand it thoroughly before investing. There are two types of interest rates called the simple and compound interest.
Simple interest means you only apply interest to the principal. Compound interest means interest is also earned on the interest received and is compounded with principal at regular intervals.
The deposits that are compounded daily are the most beneficial for the investor. To maximize your investment, go for the fixed deposits offering compound interest.
3. Length of Commitment
Generally speaking, the longer you agree to invest your money in a Fixed Deposit, the greater the interest rate offered. But don’t get excited too soon, there is a downside to a long term commitment and, like everything else in life, an upside as well.
The interest rate for five years might be really nice in today’s market but, two years from now, it might be miserable. You will be stuck for three more years.
On the contrary, in two years, the interest rate you capture today might be even more worthwhile. Banks offer competitive rates. You have to make the decision based on your crystal ball. Remember the bank is facing the same gamble. The difference is, they have many expert advisers and a lot more experience, and so make sure you do your homework.
4. Potential Fees
The bank is in the business to make money, so make sure you keep a magnifying glass in hand to check the hidden fees in their application forms.
One of the easiest ways banks make money is by charging fees. In the case of a Fixed Deposit, the fee to fear the most is the one charged for early withdrawal. That is why it is essential that you make sure you won’t have to withdraw the money before maturity. Staggering your FD investments is a way to minimize this risk.
5. Loan Availability
Should your crystal ball prove to be cloudy, and you find yourself in need of money before the FD matures, don’t panic.
If you have selected a product that can be borrowed against, it will make life easier. Instead of losing the interest you have earned, especially if you are nearing the end of the term, you will only have to pay the interest on the loan for the length of time you have it.
Because the bank doesn’t want to annoy you too much, the interest rate for a loan under these circumstances is usually better than average.
6. Tax Benefits
If you give too much of what you earn to the Income tax department, FDs might not be as beneficial as you would like.
For instance, any interest received from a fixed deposit is treated as income by Indian income tax department. Depending on the overall income you make in a financial year, you might need to pay income tax around 0%-30% on this interest depending up on the tax slab you are in.
Fortunately, there are some fixed deposits that offers tax breaks if you invest in them for more than 5 years. So, pick such type of FDs to invest.
Before you make any decision, take the time to make sure you are doing the best for yourself. Establishing a positive relationship with a bank puts you in a better position to negotiate, so learn everything you can before signing on that dotted line.
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