The tenure of a Fixed Deposit scheme is dependent on current interest rates. You’ll also need to factor in the possible changes that may occur. Here’s how.
Fixed Deposits are popular investments since the origin of banking. They offer guaranteed returns and carry minimal risk. Coupled with the facility to avail a loan against the FDs, they continue to attract depositors.
When you open an Fixed Deposit, you look for the tenure which offers the maximum interest. FDs offered a pretty decent return, averaging 10% till 4 years back. However, demonetisation has led to a drastic fall in FD interest rates. The maximum offered by nationalised banks is in the range 7% to 7.5%.
Of course, some private banks and NBFCs offer higher interest rates (as high as 11.35% on a one-year FD).
Factors Affecting FD Interest Rates
RBI policies, the general trend of the economy, inflation, repo rate, CRR, SLR are some of the factors that can impact the FD interest rate. When banks are in need of funds, the interest offered will be high. Post demonetisation, banks had abundant funds which resulted in fallof the FD interest rates.
Short Term FD or Long Term FD?
Let’s say, interest rates are going to fall in the near future, maybe due to changes in repo rate. You can lock in a long term FD. On the other hand, if interest rates are poised for a rise, a short term FD will give a return on the surplus funds. It also lets you invest in a high return FD at a later date.
If you’ve got a timeline, and have earmarked the FD for a specific short-term purpose, it’s best to go for a short term FD. Don’t break a long term FD. If you want to just earn returns from surplus funds, go for a long term FD, like a 5-year tax saving FD. In addition to returns, you enjoy tax benefits as well.
FD vs MF
Your choice of investment is based on the following parameters
FD carries minimum risk. Whereas MFs are subjected to high market risks. In fact, an equity MF carries more risk than a debt MF. With professional fund managers chipping in, it is possible to mitigate the risk and earn returns.
Returns from FD are pre-decided, hence offering you a good estimate of your cash flows. However, MFs being market driven, returns are volatile. A positive market gives you high returns but they can be low if the market is weak.
FDs offer low levels of liquidity. If you need to break the FD, you will have to settle for lower interest. MF’s offer high liquidity (subject to fulfilling the minimum holding period). An exit load is charged only if withdrawal from the MF scheme is made within one year.
FD interest is taxable and you pay tax as per your tax slab. Hence, the actual return will be less that the rate printed on your FDR. MF taxation depends on their category. Long term equity MFs are not taxable. Short term equity funds are taxable and long term debt funds enjoy the benefit of indexation. Thus, MFs are tax friendly compared to FDs
Where you should invest depends on your willingness to take risks, and the quantum of returns you expect.