Fixed deposits: These 9 factors influence investment

Though interest rates have come crashing over the past several years, fixed deposits (FD) still carry unshakeable trust of a huge section of the common people of this country who consider nothing as safe and guaranteed as a FD. However, a lot of people are also withdrawing their investments in FDs to risk it in mutual funds and directly into the stock markets. While making an FD, people evaluate a few factors to maximise returns. The unpredictability factor in an FD is almost negligible. Additionally, some of them have tax benefits too. But you should know the factors that would influence your FD returns. Money9 offers a basic guideline.

Tenure

Before investing in an FD, one should be clear about the tenure of the FD. The tenure of an FD usually varies between 7 days and 10 years or above. So according to the time when one would again require the money, one should select the tenure of the FD. Withdrawal of the money before the tenure would result in the depositor losing a part of the interest income.

Nowadays, FD can be booked over mobile banking or apps of banks.

Deposit amount

Please check the minimum amount for opening an FD. In SBI, the minimum amount is Rs 1,000 and on the other hand, in ICICI Bank the limit is fixed at Rs 10,000, though a minor can open an FD with only Rs 2,000. In HDFC Bank, the limit is set at Rs 5,000.

Interest rate

FD attracts different interest rates for different time periods. Before finalising any deposit, an individual should check the interest rate along with the tenure. Senior citizens usually get an additional interest of 50 basis points (or 0.5 percentage point) in each tenure than normal citizen.

Tax exemption

FD returns are taxable as per the respective income slabs. Bank will deduct the TDS if the interest income exceeds the limit of Rs 10,000 in a financial year. A person should submit 15G/H to the bank to let them know to not deduct the TDS.

Five-year FDs in both bank and post office are tax-free and this aspect makes them popular with a lot of citizens.

Premature withdrawal

Fixed deposits have a premature withdrawal option to withdraw money before the maturity date. The depositor will have to pay a certain amount as a fine.

The rate of fine normally varies between 1% and 1.5% of the overall amount. Some banks allow you to make a premature withdrawal with no penalty after a certain period.

Payout option

One can make his choice of the payout of FD. Either you choose monthly or quarterly or yearly option. You can also choose to get the principal and interest back at maturity.

Loan facility

An individual can avail overdraft facility against FDs too. Overdraft and loan against FD are two options for borrowing money against fixed deposits.

The fixed deposit-backed overdraft cap is lower than the deposit amount, but the interest paid is higher than the applicable FD rate. A maximum of 90-95% of the amount of an FD is given as loan.

Auto renewal

FDs generally auto renews the corpus every year until the maturity date. One can choose the auto renew option in the opening form along with other details.

Nowadays, all public sector and private banks offer online facility for opening of FD and the option of auto renew is given. You can either tick it or leave it blank.

Nomination facility

Like other instruments, FDs also have an option to have one person or more as nominees. While opening an FD, the person should fill up the nominee portion. Otherwise, in the case of unwanted death of the holders of the FD, family members would face trouble while claiming the money. If you write down the name of a nominee, the process of claiming the money would also be much easier.