A fixed deposit probably ranks as the most conventional investment avenue for domestic investors. More importantly, given its offering, it makes an apt choice for risk-averse investors. In this article, we present five things investors must look at in an FD.
1. Credit profile
The fixed deposit’s credit profile is an indicator of the degree of risk associated with it in terms of timely repayment of the principal and interest payment. For example, an ‘AAA/FAAA’ rating is indicative of the highest level of safety. Typically, an FD with a higher rating would offer lower returns vis-vis an FD with a lower rating.
The additional return in a lower rated FD is in effect a compensation for the higher risk borne. Investors would do well to decide on the quantum of risk they are willing to bear and then select an FD.
2. Rate of return
Rate of return or interest rate indicates the return that the FD investor will clock. At any point in time, it is not uncommon to find various entities like banks, small savings schemes and corporates offering differential returns on similar rated FDs. Investors on their part would do well to scout various options and select the FD that offers them the best return at a rating that suits them.
3. Interest payout options
Investors can generally choose between various interest payout options like monthly, quarterly, annually or on maturity. Ideally, the investor’s need for liquidity should be used to determine which interest payout option is chosen. Selecting the interest payout ‘on maturity’ option can help investors benefit from the compounding effect and clock a higher return.
The FD’s tenure is the period over which the investor stays invested. By and large, a longer tenure translates into a higher rate of return. Investors must match their investment tenure with their needs/objectives. For example, if the investor has an expense to meet 3 years hence, he can invest an appropriate amount in a 3-year FD to ensure that the maturity proceeds match his future obligation.
On the same lines, if there is a 5-year investment tenure, then investments can be considered in tax-saving FDs; this will help the investor simultaneously benefit from tax sops under Section 80C.
5. Premature withdrawal
An often-ignored aspect of FD investing is the premature withdrawal clause. Investors opting for a premature withdrawal can be penalised by either being given a lower rate of return or zero interest depending on the terms and conditions of the FD. Investors would do well to acquaint themselves with the implications of a premature withdrawal before making an investment.