Investing in FD comes naturally to some people. They prefer FD investments primarily for three reasons – safety, liquidity, and assured returns. But do their investments provide them with inflation-beating returns? The answer is questionable.

Fixed deposits are the most common type of investment in India. But people rarely evaluate factors like inflation rate, interest type, FD type, financial institution, etc., while investing in a fixed deposit. The following sections contain tips you need to look for in an FD to get optimal returns.

Factors You Must Evaluate Before Investing In A Fixed Deposit

Here are the top factors intelligent investors evaluate before putting their hard-earned money into a fixed deposit:

1. The Type of Financial Institution

Did you know that three types of financial institutions offer fixed deposits in India? They are – scheduled commercial banks, housing finance companies, and non-banking financial companies.

Public Sector Banks usually offer the lowest fixed deposit rates, followed by private sector banks, non-banking financial companies, and housing finance companies.

Housing Finance Companies (HFC) are a 100% safe alternative to conventional banks and NBFCs. However, you must check the HFC’s credit rating before investing. Generally, CRISIL FAA+ or CARE AA is considered the benchmark for such purposes. Credit rating agencies evaluate a financial institution on multiple quality parameters before rating them. So, you can trust the rating and invest in HFCs for assured higher-than-average returns.

2. Tenure

Fixed deposit tenure generally ranges between one (1) year and ten (10) years. The longer the tenure, the better the fixed deposit rates. For example, if you check the interest rate of the housing finance company PNB Housing, you can see that they offer an effective yield of 5.90% for investments between 12 and 23 months. But, the yield to maturity increases to 9.13% when you invest for 120 months.

Hence, before investing in a fixed deposit, you must align the investment with your financial goals and choose the correct term.

3. Type of Fixed Deposit Account and Laddering

You can invest in two broad types of fixed deposit accounts – cumulative and non-cumulative.

A cumulative account keeps your investment amount locked until maturity. Hence, you cannot withdraw before the term-end. In contrast, a non-cumulative account is good when you need monthly, quarterly, or half-yearly income. Cumulative fixed deposit rates are generally higher than non-cumulative deposits.

Intelligent investors follow the laddering method to streamline their fixed deposit investments. Laddering refers to the process of distributing your total capital into cumulative and non-cumulative deposits. You may keep some amount in a cumulative account for fulfilling future goals and the remaining amount in non-cumulative accounts for regular income.

4. Diversification

The Deposit Insurance and Credit Guarantee Corporation (DICGC) guarantees investments of up to INR 5 lakh per customer. Hence, if the bank shuts its operations and you have more than INR 5 lakh in your account(s), you may have to forsake the excess amount.

Hence, it is prudent to diversify your investment by opening multiple fixed deposit accounts with different financial institutions. As previously mentioned, a housing finance company must figure prominently if you want to earn higher returns. 

5. Pre-closure

Although one of the most significant advantages of a fixed deposit is its liquidity, it comes at a cost. When you apply for a pre-closure, the financial institution deducts between 1% to 2% lower than the prescribed rate for the investment duration. Moreover, since a fixed deposit is a taxable instrument, you may have to pay taxes from the amount you have withdrawn, lowering the returns even further.

Fortunately, most Housing Finance Companies provide loans against fixed deposit facilities to customers. You can withdraw an amount of up to 75% of your investment amount at a 2% higher than the prevailing fixed deposit rates.

6. Application Process

The fixed deposit application process might be cumbersome if you do not select the right financial institution. You may have to visit more than once to submit the application and collect the fixed deposit certificate.

In contrast, some reputed housing finance companies offer doorstep service facilities. All you need to do is enter your name, mobile number, and email address on their website and wait for an officer to arrive at your registered address. The officer will verify your documents (PAN and Aadhar Card), collect the cheque, and hand the certificate.

Conclusion

Fixed deposits are a symbol of trust. They help you fulfill your long and short-term goals. However, the best financial institution can make all the difference between low and high returns. Evaluate the factors mentioned in this article before parking your hard-earned money in a fixed deposit account.