Fixed deposits (FDs) or term deposits are one of the oldest and safest investment options available to investors. FDs are provided not just by banks but non-banking financial companies (NBFCs) in India. Popularly known as fixed deposits in India, they are called term deposits or time deposits in the United States, Australia, Canada, New Zealand and the United Kingdom.
In terms of safe investment options, FDs are still the best investment plan for millions of Indians irrespective of their age, income and education. Flexibility, safety, and assured and good returns on investment are some of the good reasons why people still flock to FDs.
Historical rate of return on FDs
Sounds almost absurd, but there was a time when bank fixed deposit interest rates were as high as 13% during 1995 to 1997. It was not just a safe investment option but the best investment plan for higher returns during the period. After the peaks of the nineties, FD interest rates started a downhill journey until 2003-04, when it fell down to a historical low of 5.25%.
Today, FD interest rates are available between 8-9%, depending on the bank or NBFC. Fixed deposits available on Finserv MARKETS offer high returns up to 8.7% and come with high CRISIL FAAA and ICRA MAAA ratings.
What is a fixed deposit?
Fixed deposit is a one time investment where a lump sum amount is invested for a fixed period of time and the investor get returns based on a fixed rate of interest. Not all fixed deposits are one time investments; there are recurring fixed deposit schemes that allow you to increase your savings on a monthly basis while interests are added on a quarterly basis to your savings.
History of FD interest rates in India
Until May 1985, banks were free to set FD interest rates for maturity between 15 days to a year up to a limit of 8% per annum but this ceiling was withdrawn. In April 1992, fixed deposits witnessed the process of deregulation in India and instead of assigning interest rates based on maturity; all deposits above 46 days were now eligible for earning interest rates up to a limit of 13%.
Then again in October, 1997, fixed deposit rates were entirely deregulated following the RBI’s decision to not link FD rates with the bank rate. RBI allowed commercial banks to fix fixed deposit interest rates as per their discretion on term deposits. Banks were also allowed to fix their own penalties for premature withdrawal domestic fixed deposits. Now commercial banks were no longer saddled with the limitation to offer the same FD interest rates on deposits of the same maturity across banks. Still today banks have complete freedom to determine their fixed deposit rates.
Types of fixed deposits
Cumulative fixed deposit
A cumulative fixed deposit is one where the interest is compounded or reinvested into the deposit and the investor receives the entire accumulated sum on maturity.
Non-cumulative fixed deposit
In a non-cumulative fixed deposit investors can choose to receive regular interest pay out. They can opt to receive the money on a monthly, quarterly or yearly basis.
Sweep-in fixed deposit is the best investment plan to enjoy the interest rates of a FD and liquidity of a savings account. In a sweep-in FD, a specified sum of money (called a threshold) is kept aside. Any amount higher than the threshold from the savings accounts is converted into an FD. If the balance in the savings account goes below the threshold, funds are withdrawn from the FD to maintain adequate balance.
For example – If you have Rs. 2 lakh in your savings account and the threshold limit is Rs. 40,000, then Rs. 1.6 lakh is automatically converted into an FD. In case your savings account balances falls down the threshold amount, the deficit is covered by withdrawing the required amount from the FD into the savings account. Sweep-in FDs also offer higher rate of interest.
Tax saving FDs
Normally fixed deposits are not eligible for tax deductions. To save tax through a FD, you can invest in a tax saving fixed deposits and get deductions up to Rs. 1.5 lakh under Section 80C. However, for tax saving fixed deposits, the lock-in period is 5 years and interest earned above Rs. 40,000 is taxable. Tax saving FDs offer average returns of 5.5-7.5%.
Benefits of fixed deposits
Good returns as fixed income investment
Since the RBI has reduced interest rates for popular saving schemes such as Public Provident Fund (PPF) and National Savings Certificates (NSC) from 8% to 7.9%, fixed deposits are gaining more favour among investors.
In 2018, a 1-year bank FD earned more than 6.5% yearly returns while stocks, real estate, and equity and debt mutual funds could hardly provide more than 7% returns. The RBI has also reduced the interest rates on Senior Citizens Saving Scheme and Sukanya Samridhi Yojana. In comparison, fixed deposits available on Finserv MARKETS gives you return up to 8.7% with the highest degree of safety ratings.
2. Immune from volatile markets
While equity mutual funds and stocks have witnessed extreme volatility in recent times and even seen returns falling down to negative, fixed deposits and gold have outshone and outperformed the market to provide consistent and risk-free returns.
3. Flexibility and liquidity
While other risk-free investment tools with guaranteed returns have long lock-in periods, fixed deposits offers high flexibility and easy liquidity. You can invest in a FD with a tenure ranging from 1 week to 10 years but at the same time you can liquidate the same in any emergency situation. It’s also easy to invest as they are mostly one time investments unless you are opting for a recurring FD. Finally, you can also take loans with the fixed deposit as collateral up to a certain specified amount.
Though FD interest rates have seen its ups and downs, no investment instrument can compare with the safety, security and stability of a fixed deposit. Irrespective of market conditions, fixed deposits have always remained a safe and lucrative option to grow your wealth.
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