Fixed deposits are a traditional form of investment that is still popular among investors in India. This is because it is one of the safest and convenient ways to generate return from investments. There are no complicated terms and conditions that perplex the investor. This is why it is one of the best investment options in India. If you are planning to invest in fixed deposits, these are 7 important tips you must consider before investing:
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As a consumer you must carefully compare and evaluate the rate of interest offered by different banks. Consider all the options available in the market and find out which bank pays good interest and other suitable terms and conditions that would meet your requirements.
In case you have surplus money which is above Rs 1 Lakh, then you must utilize this money to invest in more than one FD. It is always advantageous to split your money and invest in two or more FDs with different tenure, rather than inventing the entire sum in a single fixed deposit. This will help you withdraw one of the FDs, in case of an emergency, instead of breaking the entire deposit.
Maintaining separate FDs across maturities helps you get money at different points in time, to manage small expenses or big ticket purchases. Spreading your investment across several banks controls the penalties incurred in case of premature withdrawal.
The interest the bank pays on your fixed deposit varies according to size and tenure of the deposit. You must be familiar that interest on fixed deposits fluctuates from time to time and to maximize returns, you can opt for FDs across maturity periods. Invest in an FD where the maturity period is a year and in another FD, with long term maturity of three to five years. You can reinvest your FD after maturity, as the interest rate changes over the period.
SEE ALSO: Interest Fixed Deposits
Investing surplus money in a fixed deposit is an ideal option, as the money earns interest instead of lying idle in a savings bank account. Make sure the returns you receive from the FD, are in line with income. Interest earned on FD is added to taxable income and taxed as per income tax brackets. If income is below minimum exemption limit, submit Form 15G or Form 15H in case of senior citizens at the bank, so that TDS is not deducted on FD interest.
The 5 year Tax saver FD enjoys Section 80C benefits up to Rs 1.5 Lakhs a year. However, tax saver FDs come with a lock in period of 5 years. This means you will not be able to withdraw your deposit before this period. Consider your financial standing and your family needs before investing in tax saver fixed deposits. If circumstances demand that you have short term FDs, then do not opt for 5 year tax saver FD.
Generally, fixed deposits have a lock in period where the investor cannot withdraw the deposited amount before maturity. In case of an emergency where the investor wants to break the FD (Premature Withdrawal), there’s a penalty. Premature withdrawal is not a good option and one must consider this, only in times of grave emergency. If you withdraw the FD before maturity, then the bank will decide on the penalty which is generally 1-2% of the interest. In such a case the interest rate is also affected, depending on the tenure of your fixed deposit.
SEE ALSO: Premature withdrawals attract penalty
You may opt to reinvest the interest earned on your FD. This helps you enjoy compounding returns, which is return on return. If you don’t need the money, instead of a withdrawal, reinvest and earn higher returns. In this way you can earn better returns and also attain your financial goals. Invest in an FD and convert your idle money into income generating investment.
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