Fixed deposits are probably the one investing avenue that most people who have a bank account both know and also use religiously. In this blog, we will focus on fixed deposits offered by banks, and at a very rudimentary level.
Investing in fixed deposits is a popular and safe way to grow your savings in India. However, not all fixed deposits are created equal, and it's important to know how to maximize your returns. In this post, I'll be sharing some smart strategies for investing in fixed deposits in India, and demystifying the process
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First of all, it's important to understand the basics of fixed deposits. A fixed deposit is a type of savings account where you deposit a lump sum of money for a fixed period of time, usually ranging from a few months to a few years. In return, the bank pays you a fixed interest rate, which is usually higher than the rate on a regular savings account. At the end of the term, you get back your original deposit plus the accumulated interest. Of course you have the option of getting interest credited to your savings account periodically as well.
It is important to identify the right tenure for your fixed deposit. The longer the tenure, the higher the interest rate. However, you also need to consider your financial goals and liquidity needs. If you need the money soon, a short-term deposit may be a better option. But if you can afford to lock away your money for longer, a long-term deposit may give you a higher return.
Another important factor to consider is the bank you choose to deposit your money with. Some banks may offer higher interest rates than others, so it's important to do your research and compare the rates of different banks. Additionally, it's important to consider the bank's reputation and financial stability.
Here is an example comparing tenures across 2 premier banks as of 15 Jan 2023
Bank | HDFC Bank | HDFC Bank | ICICI Bank | ICICI Bank |
Tenure | 366 days | 364 days | 366 days | 364 days |
Interest Rate | 6.5% | 6% | 6.6% | 5.75% |
Type | Non Senior Citizen | Non Senior Citizen | Non Senior Citizen | Non Senior Citizen |
Maturity amount | ₹1,06,660 | ₹1,06,119 | ₹1,06,784 | ₹1,05,871 |
You can see that for 364 days, HDFC Bank is a better option, but for 365 days, ICICI Bank has a marginally higher rate. While one may think that the difference is negligible, over a period of time, the compounding does make a difference. Also, some of us may have several bank accounts already, but end up keeping our FDs where we have our salary accounts. It is a good question to ask if that really is the best place.
Another strategy to maximize your returns is to open fixed deposits in Small Finance Banks (SFBs) but within the insurance limit provided by Deposit Insurance and Credit Guarantee Corporation (DICGC). Small finance banks tend to offer higher interest rates than traditional banks, and DICGC provides insurance on deposits up to Rs 5 lakh per depositor per bank. This means that even if the bank goes bankrupt, you will still get back your deposits up to that limit. We will explore this option in detail in a subsequent blog post where I will blog about my experience opening a stand-alone FD with a SFB.
Finally, you can also consider opening multiple fixed deposits with different banks, but within the insurance limit provided by DICGC. This way, you can diversify your risk and potentially earn higher returns. That comes with the headache of managing multiple bank accounts, but that is the call you will need to take.
We will get into many facets of FDs over multiple blogs, since I've done quite a bit of research on this topic, and there are small nuances that can easily earn us upto 2% more by just being more cognizant of the choices we make
Trivia: The highest FD Rates in Jan 2023, globally, are in Venezuela, where a 90-day FD earns 36% p.a! Before you go trying to figure out how to invest in Venezuela, remember that they had 300%+ inflation in december 2022, which means any money you had 3 month ago, is worth much lower today. So the 36% interest rates likely will still leave you holding lesser than what you had earlier!