When you invest a principal amount in fixed deposits (FDs), you earn returns at a pre-determined rate of interest, which helps to build wealth over the long term. FDs are popular due to their assured returns and minimal investment risk.
Banks and non-banking financial companies (NBFCs) offer different tenures ranging from one year to five years. A longer investment duration offers a higher interest rate. While these instruments have several advantages, here are important factors to keep in mind before investing in them:
- Investment security
When you opt for bank FDs, the Deposit Insurance Credit Guarantee Corporation (DICGC) provides insurance up to an investment of INR 5 lakh. However, this insurance is not available for FDs issued by companies or NBFCs. Therefore, it is recommended to check the rating given by the credit agencies if you plan to invest in non-bank deposits.
- Rate of interest
The fixed deposit interest rates varies among different issuers and depends on the investment period, too. Generally, company deposits offer a higher rate of interest compared to bank deposits. You can also choose to invest in cumulative deposits, which allow you to build a higher corpus with the power of compounding.
- Investment horizon
When you invest in bank, company, or post office FDs, take your investment horizon into account to choose the appropriate duration. This is because if you do break the FD before its due date you are liable to pay a penalty, which can reduce your effective returns on investment. The premature withdrawal penalty varies among institutions. It is advisable to know about this cost before you decide to open an FD.
- Loan against FDs
A key benefit of investing in an FD is that you can apply for a loan against it. Generally, you can borrow up to 90% of the deposit amount as a loan, which can help you tide through emergency fund requirements. The interest rate on a loan against FD is not very high. So, you may consider this aspect before investing.
The interest earned on Fixed Deposit is added to your income and taxable at the applicable slab. Additionally, tax deducted at source (TDS) is applicable. Both these factors can decrease the effective FD rates. So, take these into account before making an investment decision.
In order to find out more about FDs, do visit the Mahindra Finance website and open an account comfortably.