Bank fixed deposits continue to be a popular savings option for the majority of conservative investors. Those who do not want to take risks and prefer a fixed return on their investments keep their funds in bank deposits.
Banks offer deposits across different tenure and hence depending on the time horizon, depositors can choose to open an FD account from 15 days to as long as 10 years.
A few things to keep note of before putting your money in a bank FD:
Laddering in FDs: Why and How
If you're planning to open a fixed deposit with a bank in the next few days, here's a quick reminder. Some banks have already begun to raise their FD rates. Interest rates in the economy tend to rise in an inflationary environment, and more banks are expected to offer higher rates on FDs in the coming months. So, you may either spread your finances through a 'laddering' technique or place the majority of your money in short to medium term deposits. When the shortest tenure FD matures, reinvest again for the longest term based on your needs under 'laddering.'
Lower Effective Returns
If you are in the highest tax bracket and pay 30% income tax, your post-tax returns on bank FDs would be quite modest.
The interest earned on a bank FD is taxed according to one's income tax slab. The amount of interest income gets added to the ‘Income from other sources and then taxed. Most banks are offering rates of interest of around 6.5 percent and after deduction of tax and after adjusting for inflation the effective return is almost negative. FD is best for the preservation of capital and not for wealth creation.
Special Deposits
At times, banks have a special deposit scheme for the specific tenure of say 444 days or 650 days or 888 days as well. On such deposits, banks typically offer a higher rate of interest. Opting for them gives you a higher rate by locking in funds for a few extra days.
Sweep-in FD
The FD has a lock-in period, and in order to access cash, you must prematurely break the deposit. Instead, choose sweep-in FD schemes at banks where liquidity is maintained so that you may continue to benefit from FD rates.
Explore FD of Small Finance Banks
In addition to leading banks, there are Small Finance Bank FD schemes that normally give a higher rate of interest. Small Finance Banks like other commercial banks enjoy insurance coverage of deposits up to Rs.5 lakh per depositor per bank.
