Fixed Deposits (FD)
Fixed deposits (FD) are very popular investment options in India, because they provide stable returns with lower risks. However, not all FDs are the same. They can be broadly divided into two categories: bank deposits and company deposits.
Difference between Bank and Company FDs
All banks have a FD facility. Banks use the capital raised through deposits to lend at a higher interest rate. The difference between the lending and the deposit rate is income for the bank.
Companies, meanwhile, issue fixed deposits to raise capital for business purposes. They generally offer higher returns than bank FDs. The offer of high returns is the main reason why more people are choosing to invest in company FDs, the worth of company deposit has grown by nearly 10% from 2016.
So, let’s delve deeper into the world of company FDs and enumerate their pros and cons.
The Upside
- Safety
Company deposits are carefully inspected by credit rating agencies. These agencies check whether such FDs are safe and stable. They come to a conclusion after evaluating the financial health of the company. The ratings are updated periodically.
A company with a high credit rating is likely to pay your interest on time. Further, the principal amount remains protected. Therefore, it is best you check the credit rating of a company before investing in its fixed deposit. Company deposit facility has an FAAA rating by CRISIL, which indicates “highest safety” in terms of timely payment of interest and principal.
- Higher Interest Rate
Corporate deposits give you the opportunity to earn higher income. The fixed deposit interest rate is higher than what banks offer. Companies offers FD interest rates of 7.85% for new customers, 7.95% for existing customers and 8.1% for senior citizens. In contrast, the State Bank of India provides deposit interest rates ranging between 5.5% and 7%.
- Flexibility
Corporate FDs provide flexibility of tenor. You can invest in the company deposit for a tenor ranging from 12 to 60 months.
The interest rate payment is also flexible. For example, a retired person may opt for monthly interest payout, while a young person can choose to receive interest at maturity or at the end of every year. Therefore, unlike bank FDs, corporate deposits offer multiple options to choose from.
- Additional benefits
Some companies offer added incentives to their customers when they renew their FD. This consequently bumps up their income slightly. For instance, NBFCs offers 0.10% additional interest on renewal of fixed deposit.
The Downside
- Not emergency-friendly
A financial or medical emergency can force you to close a fixed deposit before maturity. While banks may charge 1% interest rate as penalty amount, corporate deposits may charge up to 3%. Also, some companies may repay only the principal, and not the interest amount, due to pre-closure.
- Losing capital
A company with poor credit rating may offer an interest rate higher than a company with good credit rating. Investing in such a company can put your capital at risk as the company may not be able to pay the interest on time.
- Lower returns than equity
Corporate deposit returns can be lower than equity or equity-linked investments. However, equity investments can be a riskier proposition.
Major Investment Mistakes Young FD Investors should avoid
Most new investors are advised to start with a fixed deposit (FD). FDs are considered the most popular, safest, simplest and most stable of all investments for beginners.
Though FDs are currently not offering very high returns, NBFCs has come up with an interest rate of 8.10% for senior citizens. This is one of the highest in the country at the moment.
But, a great mode of investment as it may be, the FD is not foolproof. Often, young investors tend to make mistakes while investing in FDs. Let’s find out what these are and how you can avoid them.
What you need to know about FDs
Before you put in your hard-earned money into an FD, you need to know how your FD account functions. You must know about the different kinds of FD and the amount you can invest. Compare the rates of interest, the modes of interest payment and the tenors.
Check if you have the option of withdrawing the FD before maturity. Are there any tax benefits? What is the mode of tax calculation on the interest? Sort these out before you make your investment.
Mistakes young FD investors should avoid
- Investing their Entire Savings
You should not withdraw an FD before it matures—even in an emergency. You will incur a loss. It is best to invest only a part of your savings in the FD. Along with the FD, also keep an emergency fund handy.
- Withdrawing Money Before Maturity
Closing your FD account before maturity would invite a penalty. You may have to settle with 0.5–1% less than what you would have earned upon maturity. But, if you need money, you can take a loan against the FD at a lower rate of interest, mostly in the form of an overdraft.
This helps you take care of any emergency, and your deposit remains intact. You can even enjoy a high loan against your FD. For instance, Company offers a loan of 75% of the deposit for cumulative FD and 60% for a non-cumulative FD. You also get flexible repayment options at zero foreclosure and part payment charges.
- Excluding FD Interest while Filing Tax Returns
Some people invest in several FDs, believing they can avoid paying income tax. But that is a mistake. The interest you earn on the FD is not tax-free. Some even forget to mention it while filing tax returns. Only an interest amount below Rs.10,000 from savings bank accounts is tax-free.
- Being Uncertain about FD Returns
Are you uncertain about how much you will earn from your FD? You must research well and weigh the rates on offer in the market before investing. Go for an FD that offers you maximum stability and returns. For example, some NBFCs has the highest CRISIL and ICRA stability ratings and an interest rate ranging from 7.85% to 8.10%.
- Depending Entirely on the FD as a Counterbalance for Inflation
When it comes to beating inflation, the FD comes to your aid only up to a certain extent. Consider investments like stocks and mutual funds as well. The combination of the risk-free FD and high-return investments like mutual funds can help you sail through smoothly during inflation.
- Viewing the FD Interest as a Monthly Income Source for only Senior Citizens
Is your monthly income enough to take care of all your expenses? The monthly interest from your FD can come to your rescue. Use it to pay off the EMI for your new phone or the sudden medical bill that you were not prepared for.
Bottom Line
If you invest wisely, FDs can promise you high returns for a relatively small investment. But research well to avoid errors of judgement when you invest in FDs. Go through the terms and conditions carefully. Features of FDs, such as assured high returns, low risk, and flexible tenor, are indeed lucrative for a young investor. But, a detailed market research will make it easier for you to pick the best FD on offer. Take your time and make a wise decision. Company deposits can be a better bet than their banking counterparts. But, you must invest in companies that are highly-rated by prominent credit rating agencies.
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