Friday, 17 March 2017

Term deposits are a safe investment avenue for savers

It is advisable to put your hard earned money in different investment schemes to not only save for future use but also to earn better returns. Term deposits have proven to be a safe and good investment avenue for retirees, investors, and savers. Term deposit schemes are devoid of risks associated with market volatility. Its rates change on a regular basis. Deposit rates are calculated depending on the tenure of a fixed deposit. A fixed deposit tenure can be anywhere from a month to 10 years.

Types of term deposit schemes

A term deposit scheme is classified as short-term or long-term based on the tenure. The 2 types of term deposit schemes are:
  • Short-term deposits: A short-term deposit scheme can have a tenure anywhere from 1 month to 1 year. Short-term deposit schemes are for those who have short-term savings goals. If you choose a short-term deposit scheme, ensure there is an option to renew your deposit after the end of the tenure. Short-term deposit schemes have lower interest rates compared to long-term deposit schemes.
  • Long-term deposits: The tenure for a long-term deposit ranges from 1 year to 10 years. Choose a long-term deposit scheme with a competitive interest rate. Long-term deposit schemes with monthly interest earnings will offer lower interest rates compared to quarterly or yearly earnings. You should also look out for advance notice period for premature withdrawal of your deposit. If an advance notice period is required for the premature withdrawal of your deposit, then it may not serve your urgent financial need.

Features of a fixed deposit scheme

A fixed deposit account is a savings account in which you can deposit a principal amount once and earn interest on the deposited amount for a fixed tenure.
  • You can deposit money only once in a fixed deposit account, unlike a savings account. To make another deposit you will have to open a separate FD account.
  • The interest earned on a fixed deposit amount can be transferred to your savings account on a quarterly or monthly basis. This is not applicable for reinvestment schemes.
  • You can renew the deposit for another fixed period after the end of the first tenure.
  • Encashment of your FD can be done only at maturity. You will have to pay a penalty fee for partial or premature withdrawal of deposit.
  • The interest earned on your fixed deposit amount is subjected to tax deduction at the source.
Fixed deposits are preferable to savings accounts as the FD interest rate is higher for FDs.

Advantages of having a fixed deposit account

In addition to saving money, listed below are other benefits of owning a fixed deposit account:
  • A fixed deposit can be used for tax benefits under Section 80C of the Income Tax Act.
  • You can also use your FD account as collateral to obtain loans or overdraft.
  • Some banks offer higher interest rates on FD to customers above 60 years of age. You can open a joint account with a senior citizen to get a slightly higher interest rate on your FD.
  • A FD can be used to improve your credit score.
  • You can obtain secured credit cards using your FD.

Deposit rate cuts post demonetisation

Before investing in a term deposit scheme, compare the deposit rates across banks and choose the one with the highest rate to earn better interest on your savings. Indian banks were offering up to 9% interest rate on FDs. However, following the demonetisation of Rs.500 and Rs.1,000 currency notes last November, banks are now flush with cash. The drastic increase in cash inflow has brought down the cost of funds. Therefore, many national banks have reduced their deposit rates. Currently, Ratnakar Bank is offering the highest interest rate on FDs with tenure ranging from less than 1 year to more than 10 years at 7.50-7.70% p.a.