Fixed Deposits (FDs) have emerged as one of the safest and most preferred investment options, especially for those who refrain from investing in risk instruments like mutual funds or equity. Another great thing about FDs is that it enables you to manage the financial risks and lets you fulfill all the goals aspired for different stages of life. This could be securing the child’s future, hedge against any unexpected expenses, higher education of children or marriage, etc.
It is true that FDs are not as complex as other investments; there are certain facts that every investor should know before opening an FD account with a reliable financial institution. Let’s have a look at the factors so that investors can make the most of the opportunity.
- The credibility of the Issuer
Although FDs are considered safe instruments, but they are not 100% risk-free. The recent crisis in certain cooperative banks and NBFCs has indicated that investors should be very careful before parking money in an FD. If you are planning for NBFC FD, make sure you have a detailed report of the health and credit rating of the company.
- Cumulative and Non-cumulative FD
With cumulative FD, investors can reinvest the interest income gained from the FD. The interest is usually compound in nature, and at the same time, the bank also gives accumulated interest rates at the end of the tenure. But in case of non-cumulative FD, the interest is credited to the bank account at regular intervals according to the investor’s requirement.
Since the interest in cumulative FD is compounded and can be reinvested paid along with the principal amount, it gives more income. Make sure to ask about the nature of the fixed deposit you are investing in from the issuer.
- Premature Withdrawal Clause
The investor needs to pay the penalty if you wish to liquidate the fixed deposit investment before it superannuates. In most of the cases, banks charge a penalty lowering the applicable interest rate between 0.5% to 1%.
So, before you choose an FD, it is always suggested to look for the institutions that impose minimum penalty in case you do premature withdrawals. In order to be on the safer side, make sure to invest money in more than one fixed deposit rather than investing a significant amount of money in one single deposit.
- Safety of the Capital
Features of income certainty and capital protection are the two biggest USPs of opening an FD. Large private sector banks and PSU are considered to be much safer; the extent of capital protection also depends on how the RBI has categorized other banks. Presently, the banks listed as scheduled banks are covered under the deposit insurance program of DICGC, which is a subsidiary of RBI.
This program covers cumulative deposits of every depositor in the recurring, fixed, and current as well as saving accounts of up to 5 lakh with each scheduled back in case of bank failures. Thus, make sure that the institutions you choose have been categorized as a scheduled bank.
Considering all the reasons discussed in the post, fixed deposits are considered as one of the safe and strategic investments. Along with that, the facts discussed in the post will also help you to make informed decisions.