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Why invest in fixed deposits?

    IndianMoney.com Research Team | Monday, June 29,2009, 11:32 PM
 

A fixed deposit account allows you to deposit your money for a set period of time, thereby earning you a higher rate of interest in return. Fixed deposits also give you a higher rate of interest than a savings bank account. Any investment portfolio should comprise the right mix of safe, moderate and risky investments. While mutual funds and stocks are the preferred contenders for moderate and risky investments, fixed deposits, government bonds etc. are considered safe investments. Fixed deposits have been particularly popular among a large section of investors in India as a safe investment option for a long period. With fixed deposits or FDs as they are popularly known, a person can invest an amount for a fixed duration. The banks give interest rates depending on this loan amount and the tenure of deposit.

Benefits

Bellow given are the important benefits of FDs

Safety
The fixed deposits of reputed banks and financial institutions regulated by Reserve Bank of India, the banking regulator in India are very secure and considered as one of the safest investment methods.

Regular Income
Fixed deposits earn fixed interest rates for their entire term, which is usually compounded quarterly. So, those who want an income on a regular basis can invest into fixed deposits and use the interest rate as their income. This makes a fixed deposit very accepted way of investing money for retirees.

Saves tax
With the directives of the income tax department stating that investment in fixed deposits up to a maximum of Rs.100,000 for 5 years are eligible for tax deductions under section 80 C of income tax act, fixed deposits have again become popular. Fixed deposits save tax and give high returns on invested money.

Drawbacks

Bellow given are the important drawbacks of FDs

Lower rate of returns
While the money invested in stock markets may give you a return of 20% the fixed deposits will yield only about 10%. So, the money grows slowly in the case of fixed deposits.

Taxes
The interest earned on fixed deposits is fully taxable (except Tax saving Schemes) and is added to the annual income of the individual. Gains from stocks are considered capital gains while dividends are tax free.

Rising inflation
Rising inflation can wipe out the interest benefits. The actual benefits or income from fixed deposit can be annulled by a rising inflation. Suppose the inflation which is currently at 3 % rises to about 6%, your fixed deposit at 10% annual return will effectively yield only(10%-6%) = 4% of return. This return would have been (10% -3%) = 7% if the rate of inflation had not changed. This can drastically eat into your fixed deposit income.

What is the minimum amount I can deposit in FD?

The minimum deposit amount is Rs. 1,000/- Deposits can be made in multiples of Rs. 100/-. While all efforts have been made to update the information, constituents are requested to contact the branches for latest details.

Government Securities

Government securities (G-secs) are supreme securities which are issued by the Reserve Bank of India on behalf of Government of India in lieu of the Central Government's market borrowing program.

The term Government Securities includes :
-     Central Government Securities.
-     State Government Securities
-     Treasury bills


The Central Government borrows funds to finance its 'fiscal deficit'. The market borrowing of the Central Government is increased through the issue of dated securities and 364 days treasury bills either by auction or by floatation of loans. In addition to the above, treasury bills of 91 days are issued for managing the temporary cash mismatches of the Government. These do not form part of the borrowing program of the Central Government.

Features

  • Features of Government Securities
  • Issued at face value
  • No default risk as the securities carry sovereign guarantee.
  • Ample liquidity as the investor can sell the security in the secondary market
  • Interest payment on a half yearly basis on face value
  • No tax deducted at source
  • Can be held in D-mat form.
  • Rate of interest and tenor of the security is fixed at the time of issuance and is not subject to change (unless intrinsic to the security like FRBs).
  • Redeemed at face value on maturity
  • Maturity ranges from of 2-30 years.
  • Securities qualify as SLR investments (unless otherwise stated).

Features

  • No tax deducted at source
  • Additional Income Tax benefit u/s 80L of the Income Tax Act for Individuals
  • Qualifies for SLR purpose
  • Zero default risk being sovereign paper
  • Highly liquid.
  • Transparency in transactions and simplified settlement procedures through CSGL/NSDL.

National savings Certificate

National Savings Certificate (NSC) is a fixed interest, long term instrument for investment. NSCs are issued by the Department of Post, Government of India. Since they are backed by the Government of India, NSCs are a practically risk free avenue of investment. They can be bought from authorized post offices. NSCs have a maturity of 6 years. They offer a rate of return of 8% per annum. This interest is calculated every six months, and is merged with the principal. That is, the interest is reinvested, and is paid along with the principal at the time of maturity. For every Rs. 100 invested, you receive Rs. 160.10 at maturity.

NSCs qualify for investment under Section 80C of the Income Tax Act (IT Act). Even the interest earned every year qualifies under Sec 80C. This means that investments in NSCs and the interest earned on it every year, upto Rs. 1 Lakh, are deductible from the income of the investor. There is no tax deducted at source (TDS).

Features of NSC

  • Minimum investment Rs. 500/- No maximum limit.
  • Rate of interest 8% compounded half yearly.
  • Rs. 1000/- grow to Rs. 1601/- in six years.
  • Two adults, Individuals, and minor through guardian can purchase.
  • Companies, Trusts, Societies and any other Institutions not eligible to purchase.
  • Non-resident Indian/HUF cannot purchase.
  • No pre-mature encashment.
  • Annual interest earned is deemed to be reinvested and qualifies for tax rebate for first 5 years under section 80 C of Income Tax Act.
  • Maturity proceeds not drawn are eligible to Post Office Savings account interest for a maximum period of two years.
  • Facility of reinvestment on maturity.
  • Certificate can be pledged as security against a loan to banks/ Govt. Institutions.
  • Facility of encashment of certificates through banks.
  • Certificates are encashable any Post office in India before maturity by way of transfer to desired post office.
  • Certificates are transferable from one Post office to any Post office.
  • Certificates are transferable from one person to another person before maturity.
  • Duplicate Certificate can be issued for lost, stolen, destroyed, mutilated or defaced certificate.
  • Nomination facility available.
  • Facility of purchase/payment to the holder of Power of attorney.
  • Tax Saving instrument - Rebate admissible under section 80 C of Income Tax Act.
  • Interest income is taxable but no TDS
  • Deposits are exempt from Wealth tax.

Debt instruments are always preferred as the safest investment avenue. Debt instruments are the investment avenues that suit for the people those who are looking for fair and stable return.

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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