Why Investing in an FD is a Great Option?

/ By / Accounting, Finance

Fixed Deposits (FD) are one among the best investment options in India when compared to other types of financial investment schemes. Through investments in equity and mutual funds may seem highly lucrative, let’s not forget that it comes with a high element of risk. This is not the case when it comes to FDs because they are also highly rewarding and come with almost nil risk.
Of course, the FD rates offered by most banks are not very attractive but let’s not forget that there are many Non-Banking Financial Companies (NBFCs) that offer a very high rate of interest.

Apart from this, there are many banks that offer tax saver FDs. This is an ideal way to park funds, save tax and earn an interest on the same. This is a wise option because an investor can claim up to Rs.1.5 lakh as a tax deduction under Section 80C of the Income Tax Act. All banks offer tax saver FDs and they usually offer a good rate of return and come with a 5-year tenure period. Some of the banks offering these term deposit schemes include ICICI, HDFC, State Bank of India (SBI), etc. At present, the SBI FD interest rates on tax saver FDs is 6.25%. SBI FD rates for senior citizens are much higher at 6.75%. On the other hand, ICICI offers 6.5% for all individuals and 7% for all senior citizens. HDFC offers a rate of return at 6%.

Features of Tax Saver FDs

  • Tax savers FDs offer the investor multiple benefits. The deposit holder can gain the advantage of tax benefit, while also saving money and earn a certain fixed percentage of interest on it
  • It is very safe, reliable and risk-free investment option
  • Tax exemption of up to Rs.1.5 lakh can be claimed under Section 80C of the Income Tax Act
  • All individuals and Hindu Undivided Families can invest in this scheme and gain a tax benefit
  • These types of term deposits come with a lock-in period of 5 years
  • One cannot avail loans or make premature withdrawals on such FDs
  • There is no compulsion on the amount that needs to be invested
  • Senior citizens are eligible for a higher rate of interest
  • Nomination facility can be availed
  • TDS will be applicable on the interest earned

Best Interest Rates for FDs

There are many new and small banks that are paying a much higher rate of interest when compared to traditional banks. For example, Suryoday Small Finance Bank is paying interest at the rate of 9%. ESAF bank offers 9%, while Mahaveer Bank offers 8%.
Bandhan Bank is offering an interest rate in the range of 8.25% to 8.75% per annum on FDs held for a period of 1 to 2 years. While Utkarsh Small Finance Bank offers interest at the rate of 8.25 to 8.75%.

There are many NBFCs that are offering a much higher rate of interest and for senior citizens, the interest rate is only much higher. Also, NBFCs usually do receive a credit rating and they are also not dependent on market developments and hence it is a rather safe and profitable type of investment., provided the ratings are good. There are many reasons to go for company FDs. Here are a few:

  • The interest rate offered is very high
  • Most NBFCs offer an additional rate of interest for those who renew their FDs
  • Provides a very high rate of return on investment
  • Can be withdrawn prematurely and can be closed at any point of time
  • These are safe investment options because they do not depend on market fluctuations
  • Offer flexible tenure ranges and interest pay-out options

Advantages of Investing in FDs

  • Higher rate of return: The interest rates on FDs are higher than those offered for savings accounts and hence instead of keeping money in a savings account, it is wise to move it to an FD. Apart from this, there are many NBFCs that offer a very high rate of interest which is greater than what banks offer.
  • Almost nil risk: When it comes to FDs, there is almost a nil amount of risk that is involved, unlike other types of investment where there is scope for losses. Then investment is safe and also interest rates do not depend on market fluctuations like in the case of stocks and shares.
  • Guaranteed returns: Customers can be assured that they can earn guaranteed returns on an FD. A said rate of interest income will be earned on the deposit in any case. Even if an FD is withdrawn prematurely, interest will be paid up to the date until which the deposit was held in the bank.
  • Flexible investment option: When compared to all other types of investments, FDs offer an investor the advantage of flexibility. A prospective investor can choose the tenure of his/her investment, the amount he/she wants to invest and also the type of interest pay-out option.
  • Highly liquid: One of the main advantages of an FD is that it is a highly liquid. Investing in an FD is almost equivalent to having liquid cash in hand because one can withdraw money from the FD account at any point of time. Apart from this, one can also avail loans of up to 90% on the deposit amount and also make use of the overdraft facility.
  • Encourages a saving habit: One of the main advantages of this type of investment is that it helps the investor cultivate the habit of saving for the rainy days of life.
  • Tax benefits: Tax benefit can be claimed for the investment made in tax saver deposits. The tax exemption can be claimed under Section 80C of the income tax act.
  • Helps build investment portfolio: Making investments in FDs helps the customer build a good portfolio. It is one of the best options for portfolio enhancement.
  • FDs are insured: The Deposit Insurance and Credit Guarantee Scheme of India offers all FD holders an insurance of up to Rs.1 lakh on both the principal and the interest amount. This will be provided to the customer in case the bank’s license has been cancelled. This is monitored by the Reserve Bank of India (RBI).

There are numerous benefits of investing in an FD. However, it is always wise to do your research and take into consideration all factors such as interest rate, tenure, the rate of return, interest pay-out options and credibility of the institution where you are putting your money. Be wary and make sure you take into consideration all your expectations before making a plunge. If your expectation is to earn maximum returns from an FD, then it is wise to go for the highest interest rate offered in the market. However, this does not mean that you blindly go for the interest rate, it is also important to check the reliability of the investment.

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