Which type of Fixed Deposit is best?
When it comes to secure investment options, a Fixed Deposit (FD) is one of the best anyone can get. You can put aside a lump sum of money and let it grow with time, along with a good interest rate. An FD is a brilliant option for those who want a risk-free environment unaffected by market fluctuations. Inflation or deflation, neither has any impact on an FD because the interest rate here is pre-determined and doesn’t change once the account has been opened. Now, there are various types of fixed deposits in the market, and each caters to different needs and has its characteristics. Therefore, it becomes necessary to understand the various types to select the most suitable.
Types of FDs
Financial institutions offer different types of Fixed Deposits It becomes essential to assess your financial goal first and then move ahead. Knowing the meaning and terms of different FDs is crucial to selecting the best option.
Standard FDs
Almost all financial institutions offer a standard FD. Here the investor decides to invest a definite sum of money for a definite tenure, and an interest rate is pre-determined. Market conditions do not affect the interest rate in anyway. So, your return remains unaffected and assured. You can withdraw the FD in times of emergency by paying a penalty, and you can even get a loan against the FD amount.
Tax-saving FDs
Tax-saving FDs are one of the most popular types of FDs. Here you can claim a deduction in your taxable income. When you open a tax-saving FD, you have to invest the money for a period of 5 years, and this is a mandatory lock-in period. You cannot withdraw any amount prematurely from this FD. Under Section 80C of the Income Tax Act, 1961, you will get a tax exemption of Rs 1.5 lakhs against your FD.
Cumulative Fixed Deposits
A cumulative FD requires you to deposit the money for a fixed period. In this case, the interest that you earn cannot be taken out before maturity. Once the tenure of the FD finishes, all the interest will be added to your principal deposited amount, and you will get the amount earned (principal + interest). This type of FD is more suitable for people with long-term investment goals.
Non-cumulative FDs
A non-cumulative FD allows interest to be paid regularly. The interest gained will be paid according to the time set at the beginning of the FD. It can be monthly, quarterly, or yearly. A non-cumulative FD is perfect for those who need money for regular expenses.
Senior Citizen FDs
You must be above 60 to qualify for a senior citizen FD. There are multiple advantages of a senior citizen FD over the regular one. The providers offer a higher interest rate in this type of FD than a regular one. In addition, the tax exemption limit is also higher (Rs 50,000 compared to Rs 40,000).
How to select the best-fixed deposit?
Before you start looking at the types of fixed deposits, you must know what factors you should check for the credibility of the FDs.
Tenure of the FD
The interest rate of an FD depends on its tenure. A longer investment generally entails a higher rate of interest. But if you opt for a long-term, your money will be locked up for an extended period, which may create some issues. Hence, it is better to select an FD which offers the flexibility of tenure according to the goals and needs of the investor.
Premature withdrawal clause
If you wish to keep the withdrawal option open, it will be wise not to go for a tax-saving FD since it does not have a premature withdrawal facility. However, you can withdraw money from your FD account before maturity for regular FDs. But there maybe a penalty for that, do consider the same when opening an FD account.
Interest rate
You must benefit from a high-interest rate to get the maximum return on your FD. Different providers offer different interest rates. Hence, you should compare and analyse well beforehand to choose a provider offering interest rates to your liking.
Loans against FD
FDs are not only tools for secure investment; they allow you to mortgage them to get loan offers in times of need. A loan against FD is easily accessible, and you can get a maximum of 90% of the FD amount as a loan. However, the amount of loan and terms may differ depending on the loan type and the organisation where you have your FD account. It is advisable to check the terms and see if the loan facility is available.
The credibility of the FD issuer
Weighing the credibility of the FD issuer is equally important before choosing one. You can see the review and market reputation of different FD issuers and decide which one to invest with. This will enhance the safety of your FD.
Final words
There are many investment options available in the market. But FDs continue to thrive as the most popular ones. This is due to the safety and security of the deposit associated. Even the return is guaranteed and will not be affected by market fluctuations. Different options are available, so choose the ones that best align with your goals and objectives.
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