Fixed Deposits: Five Key Parameters to Focus on Before Investing in Scheme

For any investor, fixed deposits (FDs) are an ideal investment tools for long-term wealth creation. However, often the dilemma remains as to which bank to choose before parking the money in an FD scheme. 

There are certain parameters, which one can consider prior to investing in an FD scheme. 

Check the credibility and reputation of the bank: Essentially, opt for a bank that has a good track record of offering stability and reliability.

A bank’s financial health can be suitably assessed by reviewing its financial statements, annual reports, and other financial indicators

Another way is to check the financial ratings given by rating agencies such as ICRA or Crisil. For instance, an individual can check Crisi’s FAAA rating and ICRA’s MAAA rating while selecting a particular FD scheme.

Keep an eye on interest rates: This is another factor to consider while opting for a particular FD scheme.

The interest rate is the percentage a bank or financial institution will pay an individual for holding funds in their FD scheme.

Generally, longer tenure FD schemes tend to offer higher interest rates, so an individual must make sure to determine the tenure of the investment that suits an individual’s financial goals and compare the interest rates that various banks are offering for that particular tenure.

Confirm levying of any premature withdrawal and penalty charges: The term premature withdrawal relates to a condition when an individual withdraws their money prior to an FD’s maturity date. In such a case, there are banks that tend to charge a penalty, which may range from a percentage of interest earned to the percentage of the principal amount.

Look out for whether the bank is covered under deposit insurance scheme: The Deposit Insurance and Credit Guarantee Corporation provides deposit insurance of Rs 5 lakh per account holder per bank, including the principal and interest. Ideally, make sure that the particular bank that an individual zero’s in on to park their money in an FD scheme is suitably covered under the deposit insurance scheme and make a decision on this basis.

Consider FD laddering: An individual can look forward to making an FD ladder by investing in an FD scheme. This involves investing surplus money in multiple FDs instead of one.

In order to gain insight into how this works, take, for example,  an investor has Rs 4 lakh in hand. Instead of investing it as a lump sum for three years, the investor splits it into three FDs: two FDs  of a lakh each and one FD of  Rs 2 lakh, the first for one year, the second for two years and the third for three years. In this case, the investor has invested the cash in three different FDs, each maturing a year apart, thus creating a ladder.

At the end of the first year, the investor renews the matured FD for three years, creating the next rung. The year after, the FD with the two-year tenor matures and the investor reinvests it for three years, creating yet another rung. This provides an investor with liquidity at the end of each year. At the same time, one can go for an FD ladder with a five-year tenure with similar annual intervals