Fixed Deposit Advice

In India, if you’re looking for right kind of investment schemes, the best you can get is a fixed deposit. No, it’s not the best if you’re looking for returns but it stands out among other qualifying criteria’s. If you follow the public opinion, the fixed deposit will be the most obvious choice. Not because it garners highest returns on investment, but it suits the other needs of regular Indian investor: investment safety, modest returns, and tax benefits. If you’re satisfied with the above-mentioned benefits and have already made your mind, let me tell you- getting the highest interest rate doesn’t guarantee highest returns. There are other influencing factors that affect the returns from a fixed deposit.

As a common mistake, most people look for Banks/NBFCs offering a higher interest rate on fixed deposit. Whereas they don’t realize the mistake they are committing. Higher interest gains of FD doesn’t depend just on the interest rate, there are certain other factors which influence the return on investment. So, if you under the impression that you will get better returns from your FD just because the interest rate you have been offered is highest, you might be left with a bad taste in your mouth.

Here are a few tips to get the best Fixed Deposit scheme:

1. Fixed deposit interest rate

Top 10 Banks Fixed deposit rates
Image Courtesy: Policy Bazar
Top 10 Banks Fixed deposit rates
Image Courtesy: Policy Bazar
Top 10 Banks Fixed deposit rates
Image Courtesy: Policy Bazar

First of all, conduct your personal research by leveraging the internet and come up with at least 10 banks/NBFCs offering the highest interest rate. Now, some banks do claim to offer highest interest rate, but they don’t share the hidden clauses. It’s better to check with the bank/NBFC about the truth before assuming anything. Moreover, if you’re looking for high-interest rates, you might get lucky with NBFCs. However, you must remember not to get too excited if you get lucky because higher interest rate doesn’t mean higher gains, not everytime.

2. Interest calculation of Fixed deposit

If you have the list of your ’10 best-fixed deposit scheme’ prospects, the next thing to do is inquire about their interest rate calculation pattern. Banks mostly compound interest rate on a quarterly basis, but different financial institutions have different rules. In total, there are four interest calculation patterns: Monthly, Quarterly, Half-Yearly; and Yearly. Your fixed deposit will garner more profit if your bank/NBFC follows the monthly or quarterly pattern rather than the annual pattern.

Fixed deposit Interest rate compounded yearly
Interest rate compounded yearly
Fixed deposit Interest rate compounded monthly 
Interest rate compounded monthly
Fixed Deposit interest rate compounded Quarterly
Interest rate compounded quarterly

For example, for an investment of Rs 25000, fixed for a period of one year at an interest rate of 7% p.a; the interest gain in case of the monthly and quarterly pattern will be Rs 1807.25 and Rs 1796.48 respectively. However, with the same figure, an investor will earn only Rs 1750 if the interest is compounded annually. The difference might not affect you because the difference isn’t much due to smaller investment, but the difference will increase extensively with a higher principal amount. There are chances of you earning lesser returns even with higher interest rate while the other person earned more returns with a lower interest rate.

3. Investment tenor

Whether you start a Fixed deposit account with bank or NBFC, the formula to avail higher returns is by investing for longer tenor. The interest rate increases with increasing investment tenor, and the same practice is followed by banks and NBFC.

Here is a chart demonstrating the change in interest rate on fixed deposit with increasing time.

Fixed deposit interest rates of Central Bank of India
Image Courtesy: Policy Bazar

So, invest for a longer tenor and get better interest gains on your fixed deposit.

Happy Investing…

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