For many of us, fixed deposits are so simple that one doesn’t need to do any planning to invest in them. But keeping a few strategies in mind can help investors maximize their returns on fixed deposits. Read on to learn about them.
Understanding fixed deposit returns
Bank fixed deposits (FDs) are a safe and secure investment option with stable returns. But the investor has to choose the tenure, deposit amount, and interest payment frequency. As an investor, you should also know how the interest on a fixed deposit is calculated. Let’s start with the latter.
The interest on a bank fixed deposit is “simple interest.” The mathematical formula to calculate Simple Interest (SI) is as follows:
SI = (P X N X R)/100
In the formula above, P stands for principal or the amount in a fixed deposit, N for the time, denoted in years, and R stands for the interest rate. So, for example, if you invested ₹10,000 for one year at an interest rate of 7%, the simple interest would be ₹700.
Best strategies to follow and maximize your returns on fixed deposits
You could use many strategies to maximize the return on fixed deposits. In this section, we look at a few things you could do.
1. Look beyond traditional bank fixed deposits.
While traditional bank FDs are a popular investment option, it’s worth exploring other options. Corporate FDs, Non-Banking Financial Company (NBFC) FDs, and post office FDs are some other types of FDs you could look into. They usually offer higher interest rates, but remember to assess the issuer’s creditworthiness before investing.
2. Assess fixed deposit issuers based on their credit ratings.
Credit rating agencies like CRISIL, ICRA, and CARE provide ratings for fixed deposit issuers. These ratings help establish the creditworthiness of any alternatives to traditional banks. Higher ratings indicate a lower risk of default.
3. Consider cumulative fixed deposits.
In cumulative FDs, the interest earned is reinvested in the deposit, and the entire amount (principal plus interest) is paid at maturity. So such FDs can bring you higher returns than non-cumulative ones.
4. Do not break your FD before maturity.
Breaking an FD before maturity can result in penalties and lower returns. If you need to withdraw the funds before the term ends, consider taking a loan against the FD or only withdrawing a portion.
5. Minimize risk by working around the deposit insurance.
Deposit insurance protects investors up to a certain limit in the event of the bank’s failure. However, if you have a large amount of money to invest, it’s better to spread it across multiple banks. This will ensure you stay within the deposit insurance limit for each bank. And if one bank fails, you won’t lose all your money.
6. Think about the tenure of the investment carefully.
The tenure of the fixed deposit will determine the interest rate you receive. Generally, longer tenures offer higher interest rates but also come with the risk of interest rate fluctuations.
That said, it’s important to consider your financial goals and liquidity needs before deciding on tenure. If you need some liquidity, investing in short-term fixed deposits may be better.
7. Follow the laddering strategy to maximize returns.
Laddering is a strategy where you invest in fixed deposits with different tenures. This helps to maximize your returns while minimizing risk. In this approach, instead of investing all your money in a single fixed deposit, you split it into multiple ones with varying tenures. This way, you benefit from the high interest rates of long-term deposits while having liquidity, thanks to short-term deposits.
8. Submit forms 15G and 15H.
If you’re a taxpayer and your income is below the taxable limit, you can submit Form 15G (for individuals) or Form 15H (for senior citizens) to your bank. These forms declare that you don’t have taxable income and don’t need to pay taxes on the interest earned from your FDs. By submitting these forms, you can avoid tax deducted at source (TDS) on your interest earnings.
A fixed deposit can significantly unlock your earning potential if the amount and tenure are high. There is a consensus that premature withdrawals will likely affect your returns. Hence, it is wise to only invest after carefully considering your financial goals and risk appetite.