Fixed deposits are an important part of your investment portfolio, irrespective of your age and risk appetite. While financial planners will try to convince you to allocate a majority of your funds to equity-oriented instruments, a certain portion of investments in fixed income will not only provide a safety cushion to your portfolio in investment but will also give fixed returns on a periodic basis. This consistent stream of pay-outs from fixed income instruments can be a boon in planning your expenses.
Why fixed deposits are most sought after
The best option for fixed income instruments is Fixed Deposit. Others include small savings schemes, annuities, and monthly income plans offered by mutual funds but they have their volatility linked to the markets which can hamper your principal amount. The irregularity in earnings can make any fixed income impossible.
Whereas, these term deposits are a stable and efficient way to fulfill your monthly expense if planned in a systematic manner. Bank fixed deposits, post office deposits, and company fixed deposits have various pay-out and growth options to allow interest to be compounded.
Types of Fixed Deposits
Bank Fixed Deposit: A bank FD is a form of a deposit scheme under which you can deposit any amount above the minimum threshold with a bank and earn interest on the same. The period for which an FD can be opened is usually 7 days to 10 years. The interest rate offered varies with tenor and is different for different banks. You can choose the frequency of interest payment like monthly or quarterly when opening a bank FD.
Bank fixed deposits are currently offering rates of 5.5% to 7.5% depending upon the tenor. Longer tenors like 5 years will gain you the maximum yield.
Company Fixed Deposit: A Non-Banking Financial Company (NBFC) like Bajaj Finance offers a company FD. The primary attraction of this instrument is the high interest rate offered on them as compared to banks. The interest pay-out typically is quarterly, half yearly or annually. You can look at interest rates up to 9.1% in the current interest rate scenario with companies like Bajaj Finance. Upon renewal of Bajaj Finance FD, you can avail an additional rate increase of 0.25% interest rate.
How to use fixed deposits to meet your financial needs
Laddering: A dedicated amount each year to a fixed deposit will help you build a sizeable corpus. Additionally, you can use the approach of laddering – this essentially means investing any available amounts periodically during a year, possibly each month, to seek the benefit of averaging over the fluctuating FD interest rates. This approach can help you create a steady stream of income to fulfill your monthly needs. You can start with as little as INR 25,000 with multiple fixed deposits one after the other and seek out interest income each month.
Cumulative and Non-Cumulative Options: If you are looking to build a corpus with fixed deposits, ensure to go for cumulative option as they will have the interest reinvested and will be redeemed on maturity. The interest rate is a little higher than the non-cumulative option of the fixed deposit.
With laddering in place combined with a cumulative option, you can ensure you have the appropriate funds at the right time. Such an approach will help you fund your financial goals like education, marriage or even real estate investment.
If there is a requirement for immediate cash, you can go for a loan up to 75% of the maturity amount against your Bajaj Finance Fixed Deposit. You can achieve the right kind of flexibility even in bank “sweep-in” fixed deposits which offer a slightly higher interest rate to the normal saving bank account but the withdrawal facility. FDs are a perfect option to meet your need for liquid cash in times of financial or health emergencies.
With the flexibility of tenors to choose from – from 3 months to 5 years in banks and 12 to 60 months in companies like Bajaj Finance, you can ensure your liquidity is constant, safe and at the best possible interest rates. You can also go for options like a 15-month tenor fixed deposit from Bajaj Finance which offers 0.25% increased ROI than a 12-month fixed deposit. Use FD calculator to compare various FD schemes and calculate the maturity amount.