If you’re looking to create wealth over the long term without taking on too much of a risk, investing in a fixed deposit is most often the best way. Fixed deposits offer stable returns and aren’t influenced by any market movements. And with the recent interest rate hikes by both banks and Non-Banking Financial Corporations (NBFCs), FDs are now more attractive than ever.
That said, not all fixed deposits are the same. Some might offer better returns, while others might be safer. And so, it is important for you to invest in the best FD plan that matches your financial objectives. But then, how do you do that? Here are a few factors that you can consider to help you identify the right FD plan for your future savings.
Focus On Getting High Interest Rates
The first and most important factor that you should take into account when determining the best FD plan is the interest rate on offer. It is important to invest in a plan that offers a high rate of interest as it can help you meet your financial goals in a much faster time frame.
The FD interest rates are usually dependent on a multitude of factors. This includes the financial institution, the amount of investment, the tenor and your age. Although banks have now increased their FD interest rates, there are still quite a few NBFCs that offer even higher rates of interest.
Therefore, it is a good idea to compare multiple FD offers with one another before you invest in one. This way, you can ensure that you make a financial decision that’s right for you.
Choose the Right Type of FD
The next factor that you would have to consider is the type of FD plan that’s better suited for your financial goals. As a matter of fact, there are two different kinds of FDs that you can invest in – non-cumulative FD and cumulative FD.
In a non-cumulative FD, the interest from the deposit is paid out to you periodically. Almost all financial institutions offering such a fixed deposit allow you to choose the interest payout frequency. You can choose to receive the interest on a monthly, quarterly, half-yearly, or on annual basis.
In a cumulative FD, on the other hand, the interest is not paid out to you during the tenor of the deposit. Instead, you only receive it once the FD matures along with the principal investment amount.
The choice between a cumulative FD and a non-cumulative FD should always be taken only after considering your financial objectives.
Look For Secure FD Plans
Although fixed deposit plans are considered to be safer than other investment options, they’re not entirely free from risk. Therefore, when choosing the best FD plan for yourself, you should always take the level of safety that it offers into consideration.
In the case of bank FDs, the Deposit Insurance and Credit Guarantee Corporation (DICGC) provides insurance coverage for your deposits to the tune of ₹5 lakhs. Thanks to this insurance coverage, the investment risk is greatly lowered in the case of bank fixed deposits.
However, seeing as this benefit of insurance is not available in the case of corporate FDs, it is up to you to ensure that you invest in a plan that has low risk. Credit rating agencies like CRISIL and ICRA assign ratings for FD plans and NBFCs.
Analysing the credit ratings of the corporation and the fixed deposit is a great way to assess its risk. The higher the credit rating is, the lower the risk associated with the deposit plan. Consider investing in AAA-rated or MAA-rated corporate FD plans since they usually carry a very low risk of default.
Go through the Terms and Conditions Thoroughly
When choosing the best FD plan to invest in, you should always make sure that you read the various terms and conditions associated with it. The features and terms are likely to be different for different FD plans.
For instance, some fixed deposits may allow you to avail a loan against it, while others don’t. And even in the case of FDs that offer this feature, the amount of loan that you can avail may vary depending on the financial institution.
Similarly, almost all FD plans nowadays offer a premature withdrawal facility. However, based on the financial institution, there may be a few restrictions or limitations with respect to premature withdrawal. Also, you may be liable to pay a penalty when you decide to withdraw your FD before the end of the tenor as well. The rate of penalty may also vary from one institution to another. It typically ranges from 1% to 3% of the rate of interest applicable to you.
Reading through the terms and conditions of an FD can give you a better idea of whether it is the right fit for you or not.
By taking into account the above-mentioned factors, you can ensure that you choose the best FD plan for yourself. Also, while you’re at it, consider investing in a fixed deposit plan that has an easy application process; preferably one that can be done online. Opening an FD online is far more convenient and takes much less time than doing it by visiting a branch.