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.