How to choose the best fixed deposit: Things to know

We list the important factors to consider when you invest in a fixed deposit.

Opening a fixed deposit account makes fiscal sense on many levels. On the one hand, it is considered a safe deposit with predictable returns. On the other hand, it is an upfront investment that does not need constant monitoring.

But apart from the ease of opening the account and the benefits it provides, there are certain factors that you must be aware of before opting for it:

* Study the rates of interest. Every leading bank and NBFC offers a competitive fixed deposit rates in India. However, there are some differences across the fixed deposit rates in India. At the moment, the lowest rates hover around 5.5% while the highest are a little over 7%. The higher the rate of interest, the higher is the earning potential of the deposit. Do study the fixed deposit rates across leading financial institutions before shortlisting three of the best ones. Also, the rate of interest may be higher for a longer-term FD, but the tenure you select must depend on your financial goals.

* Think about ‘laddering’ your investment. This is an approach in which you maximise the fund of money at your disposal to get income at regular intervals, without being affected by future rate upheavals. Instead of depositing Rs 5 lakh in the bank at one go, you can split the same amount into five parts of Rs 1 lakh each, and create FDs of increasing tenures: 1 year, 2 years, 3 years, 4 years and 5 years. This way, you will have one fixed deposit maturing every year, which helps you achieve different goals. Or you can reinvest the previous year’s deposit in a fresh FD if you don’t need the money immediately.

* Find out about the application process. Though many banks insist on applicants signing up paper application forms and submitting them physically at the bank, some leading NBFCs offer customers online applications for FD. However, you will still need to open an account with the financial institution to complete the process. Online application is faster and more cost-effective than an offline one. Also, comparing fixed deposit rates in India is easier online than offline. You must submit your financial proofs (bank account statements), personal ID proofs (PAN card/Aadhaar number) and residence proofs along with the application.

* Find out about premature withdrawal charges. The fixed deposit is highly liquid – you can withdraw it prematurely if you need money, or you can borrow a loan against it. But do note that premature withdrawal invites penalties. The financial institution may levy a 1% charge on premature withdrawal, which will eat into any interest earnings you may get. Study your future roadmap before choosing the tenure: if you are likely to require money in three years, then it does not make sense to park your funds in a 10-year deposit and then withdraw it before maturity.

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