In India, people generally prefer to keep their surplus funds in a Fixed Deposit. Safety and guaranteed returns are the two reasons which form the basis of this investment option. Since FD rates change and other investment options are also available, one question remains: Are FDs worth consideration today? Let’s discuss this in detail.
Understanding FD rates
FD rates determine how much interest you earn on your savings. When FD rates go up, there’s often a surge in demand for them. However, when rates drop, people begin to question whether they should keep their money locked in an FD or consider withdrawing it.
The FD rates are determined and set by banks and institutions based on the following variables:
- Inflation: When inflation rises, interest rates typically increase as well.
- Repo rate: Higher repo rates often lead to better returns on Fixed Deposit interest rates from banks.
- Market conditions: During bullish market conditions, banks tend to offer more attractive deposit rates.
Are FDs still worth it?
That will all depend on what you intend to use it for. If you want peace of mind with guaranteed returns, FDs are one of the best options.
However, if you are looking for higher returns and can take risks, you can opt for other investment avenues like stocks, mutual funds, or even debt funds. These investment options offer higher returns but are subject to risks.
Who should invest in FDs?
- Conservative investors whose priority is safety rather than high returns.
- Retired people who need regular income.
- Short-term investors who are looking for a safe place to put away their money for a couple of months or years.
Maximising your Fixed Deposit investment
Here are some tips to maximise your FD investment returns.
- Keep track of FD rates: While some banks may decrease rates, others may turn to offers. Thus, an FD investor should always compare before taking up anything, as even minor percentage differences may have a larger impact.
- Right choice on the tenure: Long tenure mostly offers a higher rate of interest. Locking in funds for a longer tenure may not always be feasible. To balance liquidity and returns, it’s a good strategy to diversify between short-term and long-term FDs.
- Special FD Schemes: Banks offer higher FD rates specifically for senior citizens, women, and special deposit schemes. Once again, if you fit into any of these categories, it’s possible for you to receive some additional cash in your account.
- Fixed Deposit laddering: You can enjoy Fixed Deposit laddering. This means dividing your deposit into different tenors instead of making firm placement all into one FD account. This will help maximise your portfolio’s flexibility with respect to liquidity needs while benefiting from fluctuating interest rates.
Other alternatives to FDs
Here are some other options for FD that you may explore:
- Recurring Deposit (RD): Best suited if you want to invest small amounts at regular intervals.
- Debt Mutual Fund: Better returns than Fixed Deposits, albeit with some degree of risk.
- Government-Sponsored Scheme: Certain government-promoted savings schemes come with relatively good interest rates as well as some tax benefits.
Conclusion
If security, stability, and assured returns are some of the prime requirements in your investment philosophy, FDs can still be a good option. At the end of the day, what works for you is what counts. Your financial goals, risk appetite, and holding period are going to be pertinent factors in finding out whether FDs are the best option for you.
