How to choose the best Fixed Deposit Scheme?


Bank Fixed Deposits are one of the oldest and popularly preferred investments in India. They currently fetch rates in the range of 5.5% to 6.50% for a period of 1 to 10 years. The main reason for the preference is the security that comes with the FD as your principal receives a fixed interest amount at a fixed rate and compounds over the years. They also come in varied tenures from 7 days to 10 years.

However, these FDs have some drawbacks like premature withdrawal which comes with a penalty, and reinvestment that happens at a lesser rate than the previous one (if the rates are decreasing).

Few factors to consider while you compare the FDs available in the market:

1. Bank Credibility: According to the depositor insurance program by DICGC, FDs of the amount Rs 5 lakhs are insured under this. It is a good practice to check the credit rating of the bank and to diversify the FDs in different banks to reduce dependency.

2. Rate of Interest: Based on tenure, the interest rates are offered by banks. which also vary from bank to bank. The age of the depositor also plays a factor. Higher the amount invested higher is the interest rate and Senior citizens get 0.5% more rate for the tenure.

3. Types of FDs: Two types, Cumulative and Non-cumulative FD. Cumulative FD reinvests the interest earned regularly on a quarterly basis. On the other hand non-cumulative, FD credits the interest earned in the account or the specified interval. Retired people and pensioners prefer non-cumulative FD to meet their monthly expenses.

4. Loan: FDs allow the investor to take a loan of up to 90% of their deposit in case of any financial emergency. The tenure of the loan is the maximum tenure of the FD. Banks usually charge 0.5% to 2% interest above the applicable FD interest rate on the loan availed.

5. Premature withdrawal: In case of premature withdrawal of their fixed deposits, investors have to pay a penalty charge which defers from bank to bank. The penalty is charged by lowering the applicable interest rate by 0.5% to 1%. Some banks don’t even charge a penalty of premature withdrawal, but it is wiser to opt for investing in FDs in the banks which have a low penalty charge That is how you select a bank for FD investment.

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