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What are the things to consider while investing in a fixed deposit

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Fixed deposits are considered as one of the viable options for investment as it offers less risk as compared to other market-based investments like mutual funds. With good returns, it is one of the popular choices for investment among different classes of people. In a fixed deposit, you invest your funds as a lump-sum payment for a determined tenure and the financial institutions will provide you principal amount and the compounded interest as the fixed deposit matures. You can invest in FD for a short term as well as long-term ranging between 7 days to 10 years.

However, before investing in a fixed deposit, here are some of the things that you must keep in mind:

Investing For Beginners – Where To Start, Types Of Investments

  1. Cumulative v/s Non-cumulative fixed deposits: In a cumulative fixed deposit, the interest is cumulated at the end of maturity period along with the principal investment and is suitable for investors who have invested their funds for long-term growth. On the other hand, non-cumulative fixed deposits are the deposits in which interest rate on Fixed Deposit is compounded at a regular monthly, quarterly, annually interval and is ideal for pensioners who require funds to manage day-to-day expenses.
  2. Duration of the investment: The returns on the fixed deposits are dependent on the tenure of the investment. Longer the tenure of investment, higher the returns you will get on your investments. However, the rate of interest on the deposits remains constant in all the mandates. The other factors which determine the rate of return on investment is the age of the investor. For instance, the rate of interest on fixed deposits offered to senior citizens is higher than provided to others.
  3. The credibility of financial institutions: Fixed deposits are one of the safest investment instruments are there are rare chances of any defaults of the financial institutions or banks. Also, the cap for insurance amount of the fixed deposits is Rs. 1 Lakhs. Thus, it is crucial to ensure that financial institutions have sound credibility. To ensure that you must check the credit ratings provided by credit agencies to these institutions.
  4. Penalty on fixed deposits: If you wish to get high returns on your investments you must ensure that you don’t withdraw the funds from fixed deposits before the maturity date unless very important. It is because banks and financial institutions charge a penalty of 0.5% to 1% on premature withdrawal of fixed deposits. There may be some banks which waive off the penalty fee if you have withdrawn the funds for an absolute emergency. But, most of the banks allow this with specific terms and conditions. For instance, some of the banks allow premature withdrawal without any penalty charges if an investor agrees to invest in another fixed deposit for a more extended mandate with the same institution. However, it is prudent that you don’t break the FD even after the maturity period and renew the FD even you don’t need the funds for any big purchase or emergency to get good returns on your investments.
  5. Loan against fixed deposits: You can also get a loan against your fixed deposits in case of any emergency. The rate of interest on the loan against fixed deposits is 1%-2% higher than the rate of interest on fixed deposits. You must evaluate the interest rates of different banks to get the loan at the lowest interest rate.

 

Thus, you can maximize the returns on investment by carefully choosing the tenure and amount of investment.

 

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