In a country like India, bank fixed deposits are still a much-preferred instrument despite the lure of several high-risk, high-reward instruments becoming more accessible with the launch of online investing platforms.
Consumers continue to seek out low-risk reward investing opportunities that offer security, and the traditional fixed deposit still ranks high on this list.
So, how can you choose the best fixed deposits for your investment portfolio when making investment decisions?
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Here are some guidelines to refer to when making a choice:
Guidelines to Choose Best Fixed Deposits for your Investment
Is the Bank Credible?
It is extremely important to look at interest rates in silos and consider other aspects such as the institution’s credibility. These days many banks are merging or even being convicted of fraudulent practices. Check the credit rating of the bank, and also scan the news for any negative press.
Can You Prematurely Withdraw?
Life can be uncertain, and you may someday find yourself in a position where you need to withdraw the principal and interest accrued in advance.
Check the rules for this, as well the penalty amounts. Ideally, the bank should allow you to withdraw the full amount sans a penalty, in say, three months. The interest, of course, shall be reduced. Having all the information will help you make the right decisions.
What Is the Interest Rate?
Banks offer varying rates of interest. One unique aspect to note is that senior citizens get a higher interest rate by about 0.5%.
Other factors that influence interest rates include the tenure you choose. The longer the tenure, the higher is the interest rate. If you prematurely withdraw the principal amount, this will also impact the interest you accrue. In terms of interest, typically, NBFCs tend to offer some of the highest FD rates.
Is It a Cumulative Account?
If you want to access the highest FD rates, you can also look at the cumulative deposit option, which regularly re-invests the interest earned. This has a quarterly compounding effect on the amount received at maturity. This is a great option if you continue to receive an income via professional earnings or a salary.
However, suppose you are a retired citizen. In that case, you can opt to have the interest credited into your savings account on a monthly, bi-yearly, yearly basis and go for a non-cumulative fixed deposit. Ultimately, it depends on what your needs are.
Does It Offer Tax Savings?
If you are looking at fixed deposits as a tax saving option, go for a five-year tenure. This is an additional benefit besides the security aspect and interest accrued.
Can You Take a Loan?
The best fixed deposits are not just about high interest rates but meeting multiple needs.
Many consumers are unaware that fixed deposits also offer a loan facility. As a fixed deposit investor, you can avail of up to 90% of the amount in your account during an emergency. This is a very useful facility for investors as you have the option of keeping the loan tenure up to the tenure of the fixed deposit. The bank would charge an interest of 0.5-2%, which is much lower than taking a fresh loan, which is difficult to avail of in an emergency.