A fixed deposit (FD) is an ideal investment product with a combination of assured returns and low risk, giving you the confidence to plan your future. Individuals consider FDs seeking to stabilize returns during volatile markets. As per estimates, FD accounts account for more than Rs 99 trillion in the Indian financial system.
How to Maximize FD Returns
You can earn interest as high as 7% in an FD with renowned banks like RBLBank. Here are the key factors that can help maximize your FD returns:
- Choose Longer Tenure to Increase Interest Rate
FD accounts opened with a longer tenure offer higher interest rates to depositors. Bank FD tenure can be between 7 days and 20 years. Individuals looking to increase their FD returns prefer long-term FDs with a maturity period between 5 to 10 years, even more up to 20 years. Once your FD interest rate is fixed, it will remain the same for the entire tenure, irrespective of changes in interest rates in the economy. Use an online fixed deposit calculator to check the returns before investing, and choose the FD tenure carefully. Invest funds only if you can comfortably deposit the amount for a longer tenure. The FD issuer can decrease your interest rates of FD as a penalty for premature withdrawal.
- Faster Growth of Funds in Cumulative FDs
You can enjoy the power of compounding interest on your FDs as cumulative interest earned gets reinvested. FDs offer cumulative and non-cumulative options for interest payments. A cumulative FD can increase your returns with the compounding interest. It keeps reinvesting your interest accrued with the principal, and you get a significant amount at maturity. On the other hand, a non-cumulative FD allows you to receive interest monthly/quarterly/annually, depending on the bank FD terms and conditions. Consider a cumulative FD with a higher interest rate relatively to increase your FD returns. An online fixed deposit calculator calculates returns for both interest options.
- Senior Citizen FDs Offer Additional Interest Rate
The depositor’s age is driving FD interest rates. Senior citizens can earn more on their lifetime savings and move closer to no-compromise retirement life. A senior citizen FD for individuals aged 60-80 years can increase returns with an additional interest rate of 0.50% over the regular FDs. This is 0.75% for super-senior citizens. These FDs are for individuals aged 80 years and above. NRE/NRO non-resident won’t be eligible for senior and super senior citizen FD rates.
- Follow Ladder Investment Strategy to Ensure Liquidity.
Sometimes investors need urgent funds in the interim period of FD. If you withdraw FD before maturity, you’ll lose the interest rate as a penalty. With the ladder investment strategy, you can keep your funds safe from such losses. For example, if your capital to invest is Rs. 2,50,000, you can split it into two FDs with different maturity dates, say one year and two years. This ladder strategy will provide you with liquidity. Also, it will help you to renew your FD at a higher interest rate in the current rising interest rate environment.
- Take a Loan Against FD
It is a viable option to take a loan against your FD to overcome short-term contingency. Avoid penalties that can reduce your FD interest rates and, thus, returns. Let your FDs earn for the entire tenure and use borrowed funds against it. Check all charges applicable to FD loans.
In a financial year, you can invest in tax-saving FDs for tax deductions up to Rs.1.5 lakhs under Section 80C, Income Tax Act, 1961, and increase your FD returns. Make sure you need your invested funds after five years, as premature withdrawal is not allowed for tax-saving FDs.
Thus, FDs are acknowledged as the most viable investment instrument and gaining more popularity with the rising interest rates in India. An FD is an essential component of an investment portfolio, especially for long-term investors. Investors can strategise their FD investments, considering the right tenure, amount, and tax saving options to maximize their returns.
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