Fixed Deposit has always been one of the most common ways of Investing in India. They have always been the first choice for the conservative investor since they carry almost no risk. But, due to the recent demonetization, fixed deposit interest rates have been slashed drastically by most banks. This affects the returns of the investor, forcing him to seek other investment avenues.
Fixed deposit is a type of financial instruments provided by banks for a fixed tenure and offer fixed rate of interest. The FD Interest Rates vary from 4%-8% depending on the tenure of the investment. It is seen that higher the tenure, higher the interest rate and vice versa. Also, if the investor is a senior citizen, the FD interest rate applicable is generally
0.25-0.5% higher than the regular rate.
The biggest advantage of investing in a fixed deposit (FD) scheme is that the returns are guaranteed irrespective of the market condition on the date of maturity. But like any other credit instrument, the credit behind a fixed deposit is of the bank issuing it. Also, another important point is that each depositor in a bank is insured up to a maximum of
INR 1,00,000 (Rupees One Lakh) by the Deposit insurance and credit guarantee corporation (DICGC).
Fixed deposits offer a rate of interest of around 4-8% p.a. whereas, Savings Account only offer around 4% interest rate per annum. The banks that offer above 4% require the minimum balance to be around INR 1 Lakh and above. Also, if the minimum balance is not maintained in the savings account, the bank can charge maintenance charges for every month the account balance is below the minimum prescribed account. Thus, making fixed deposits a better choice.
Many banks accept fixed deposits as security against loans. They consider the principal amount and create a charge on the FD. This is a quicker process as compared to keeping real estate or other assets as loan security.
Fixed deposit offers the flexibility to choose the tenure of the deposit. You can decide at the time of investment, what should be its duration. The investor can also decide the frequency of his returns. Returns can be received monthly, quarterly or annually.
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One of the biggest flaws of investing in a Fixed deposit is that the FD interest received is fully taxable. In case the FD interest rate is over
INR 10,000, banks are authorised to deduct
TDS @ 10% p.a. the total interest is included in the investor’s total income and is then taxed as per the individual slab rate.
Another major disadvantage of investing in FDs is the exit load. Exit load is a penalty charged when the FD is withdrawn prematurely. The investor ends up losing valuable interest in thus making fixed deposits unfavourable in terms of liquidity.
Inflation hedging instruments are those which provide protection against the decreased value of the currency. Fixed deposit do not act as an inflation hedge, thus, eating into the returns of the investors.
Since the FD interest rates have been drastically slashed, investors should look at other options which give more value for their money.
CPs are issued by large corporations and financial institutions to meet their short-term liabilities. They are usually called promissory notes that are unsecured and are sold at a discounted Face Value. Their maturity period can be anywhere from 7 days to 1 year.
T-bills are short-term financial instruments issued by the Central Bank of a country. Though the returns aren’t that high, it is one of the safest forms of investments since it carries no market risks. The maturity periods for T-bills could be varying from 3-months,6-months and 1 year.
CDs are term deposits that are offered by banks and financial institutions. It is a savings certificate that has a fixed interest rate and a fixed maturity period. The only difference between CDs and fixed deposits are that CDs cannot be withdrawn until their maturity date thus, totally blocking the funds.
Investors can also invest in Liquid Funds which would offer returns similar to those of fixed deposits and at the same time providing liquidity, withdrawal without penalty. Also, if held for a long period( > 3years) they would attract long-term capital gains instead of taxation at a marginal rate making them tax efficient.
Fund NAV Net Assets (Cr) 3 MO (%) 6 MO (%) 1 YR (%) 3 YR (%) 2018 (%) Debt Yield (YTM) Mod. Duration Eff. Maturity UTI Ultra Short Term Fund Growth ₹2,986.1
₹5,077 2.1 3.7 7.1 7.5 7 9.49% 4M 16D 7M 8D Reliance Ultra Short Duration Fund Growth ₹2,861.44
₹4,292 2.3 4 7.5 6.7 7.3 9.1% 4M 21D 5M 5D Invesco India Ultra Short Term Fund Growth ₹1,878.64
₹900 2.2 3.9 7.5 7.9 7.3 9% 5M 2D 5M 18D BOI AXA Ultra Short Duration Fund Growth ₹2,228.44
₹414 2.2 3.9 7.8 8.3 7.6 8.87% 3M 7D 3M 20D ICICI Prudential Ultra Short Term Fund Growth ₹18.573
₹2,891 2.3 4 7.6 8.1 7.5 8.72% 3M 7D 3M 29D Aditya Birla Sun Life Savings Fund Growth ₹362.913
₹14,949 2.4 4.2 7.9 8.1 7.6 8.4% 5M 8D 6M 4D Kotak Savings Fund Growth ₹29.4717
₹6,888 2.3 3.9 7.6 7.5 7.4 8.4% 5M 12D 5M 26D Principal Ultra Short Term Fund Growth ₹1,959.13
₹56 2 -2.1 1.3 5.1 1.2 8.24% 3M 18D 3M 29D Indiabulls Ultra Short Term Fund Growth ₹1,782.82
₹556 2.1 3.6 7.3 7.7 7.1 8.2% 4M 13D DSP BlackRock Money Manager Fund Growth ₹2,401.2
₹3,065 0.9 1.7 5.2 6.2 5 8.1% 3M 11D 3M 25D Note: Returns up to 1 year are on absolute basis & more than 1 year are on CAGR basis. as on 18 Jan 19
Other alternatives to fixed deposits are Mutual Funds or Money market funds. When comparing fixed deposits against mutual funds, the returns in the latter are comparable or slightly higher with certain differences in the risk factor.
Since fixed deposit is cutting into the returns, it is time to seriously consider other investment options to optimise your returns. So, choose wisely and invest smartly today!