A fixed deposit is a financial instrument which allows you to grow your savings at a pre-determined, fixed rate of interest for a specific tenure. You get to choose whether you want to get the interest income periodically or receive the principal and interest on the deposit’s maturity.
As such deposits are not market-linked, the returns are not impacted by market fluctuations and are assured. These factors tend to make deposits a favourable option for risk-averse investors. Nowadays, investment in fixed deposits can be made online, but before investing, let’s learn how to select the best fixed deposit.
Ways to choose the best fixed deposit
● Interest rate
In a fixed deposit, a bank or a Non-Banking Financial Company (NBFC) promises to pay you a fixed rate of interest for the money deposited by you. If the interest rate is less, you will earn less and vice-versa.
Therefore, it is extremely important to understand what interest rate the financial institution is offering on your fixed deposit. The interest rate varies across institutions. So, look for one that offers a higher interest rate on your fixed deposit.
● Tenure
Investment in fixed deposits can be made ranging from 7 days to 10 years. The interest rates offered by institutions are linked with the tenure of the fixed deposits. Generally, with the increase in the tenure of a fixed deposit, the interest rate offered also tends to increase to a certain point.
● Compounding
As an investor, you should always expect more compounding so that your investment grows. The difference between compounding interest and simple interest is that in the case of compounding interest, the interest rate is provided on the principal as well as the cumulative interest earned; however, in the case of simple interest, the interest is provided only on the principal amount. So, before parking your savings in a fixed deposit, check whether the compounding interest provided by the financial institution is annual, semi-annual or quarterly.
Exploring other options to grow your wealth
Bank deposits have been one of the most preferred financial instruments for Indians. In fact, as per a 2019 survey conducted by the Securities and Exchange Board of India (SEBI), more than 95% of Indian households preferred bank deposits to other investment instruments. While a fixed deposit could work for you if you are looking for a low-risk investment avenue, it won’t be able to provide attractive returns when compared to other options available.
To grow your wealth and meet short- and long-term goals, you could consider investing in mutual funds or stocks. It is prudent to reach out to a financial expert to help you to make smart investment decisions based on your risk tolerance, investment horizon, financial standing and age.
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