As per RBI, 57.7% of the total idle financial reserves in India are kept as fixed deposits. The primary reason behind the popularity of such schemes is that they come with attractive FD interest rates and generate high returns on total investment amount at negligible associated risks. It is one of the highest interest-bearing tools available in the Indian market.
Factors deciding the FD interest rates
Interest rates on fixed deposits range between 6-8% on an average. Such return rates depend on various factors, such as-
Tenor of investment
Such payable returns heavily depend on the lock-in period of investment, and they demonstrate a positive correlation. A fixed deposit having a long tenor is likely to generate higher returns, as compared to ones having a lower lock-in period.
Thus, the tenor on your FD affects its interest rate significantly.
Nature of fixed deposits
Standard fixed deposits can be of two types- cumulative or non-cumulative. Cumulative FDs reinvest total interest generated annually, effectively increasing the principal amount. An increase in the corpus generates a higher interest amount in the subsequent years, thereby increasing the total value of deposit realised on maturity.
Non-cumulative fixed deposits, on the other hand, have a relatively lower annual return generated, as interest is paid out on a monthly, quarterly, half-yearly or yearly basis, keeping the principal amount constant.
Age of an investor
All major financial institutions bring provisions of higher interest rates for senior citizens. Such benefits are aimed towards increasing the average returns on investment of these individuals who are no longer able to generate income. Renowned NBFCs such as Bajaj Finance provide a 0.35% additional interest rate on FD for retired investors. It allows them to procure adequate funds that suffice their financial needs.
You should initiate a careful analysis of the points mentioned above before investing in fixed deposits.
Additionally, several alternative investment options offer high returns equivalent to FD interest rates, such as-
Equity investments in the share market
Stock markets are known to generate high returns on total investment, sometimes even higher than fixed deposits. However, such tools are extremely volatile, as they are prone to market fluctuations. It is quite difficult to predict any such fluctuation in the overall price level of stocks, and thus, might lead to huge losses for beginners. Gains on such investments can, therefore, only be realised by stock market experts.
Consequently, determining fixed deposits vs equities which is better depends on an investor’s understanding of stock markets. Fixed deposit investments, on the other hand, have nominal associated risks, which can be further reduced by choosing top-rated agencies such as Bajaj Finance.
Public Provident Funds (PPF)
As an investment tool, PPF offers stable returns on total investment, as the Central Government backs it. It is one of the best investment options in India, as it has zero risks associated with it.
However, PPF comes with a mandatory lock-in period of 15 years, wherein the entire corpus remains with the concerned financial institution. It might bear an adverse effect on the liquidity needs of an individual, as the withdrawal is not permitted under normal circumstances.
A fixed deposit investment, on the other hand, comes in with a maturity period ranging from one to five years, thereby making the funds accessible in the short run. Also, the amount of fixed deposits can be withdrawn at any given time, after the deduction of a nominal processing charge. No such provisions are applicable on public provident fund investments.
- National Savings Certificates
National Savings Certificates (NSCs) are investment tools available at post offices all around the world. Such investment tools are backed by the Central Government as well, thereby ensuring no risk on total deposits. These instruments come in with two maturity periods – five years and ten years, respectively. National savings certificates generate returns similar to FD interest rates, therefore making them an ideal alternative investment tool.
The primary purpose of investment in fixed deposits is to provide optimal funds to individuals that suffice during retirement. It also allows individuals to plan their expenses and generate adequate revenues accordingly to meet long-term expenses.
Gaurav Khanna is an experienced financial advisor, digital marketer, and writer who is well known for his ability to predict market trends. Check out his blog at HighlightStory