Investing in COVID Times: Dos & Don’ts of Fixed Deposits for Maximum Returns

Fixed Deposits have always been a preferred investment option for a majority of Indian households. These are mostly risk-averse investors, looking out for capital protection the most. Term deposits with banks are not ideal for building long term wealth. If you are investing for 5 or more years, the chances are high that your Mutual Funds SIP started today will fetch you much attractive returns. Yet, equity is volatile, and exposure to the market funds should be limited, subject to the risk appetite of the investor. The preference for FDs thus is thus ubiquitous among many investors.

In the current times of financial uncertainties amidst the spread of Coronavirus, Fixed Deposits have attracted a lot of attention. Despite falling rates regime, people want to park money for a fixed rate of interest. Equity and debt funds are in the red zone for many. Here in this article, let’s understand what is the scope of saving and investing with fixed deposit. We would try to find out if a fixed deposit the right medium to save and invest for your kid’s education, Home Loan downpayment & other life goals.

Here are the dos and don’ts of investing in Fixed Deposits during the COVID Times:

Dos

1. Use Laddering of deposits

Laddering is one of the right investment strategies to buy FDs during a falling market regime. Herein, you purchase multiple FDs of varying maturity dates, thereby ensuring adequate liquidity and ensuring the benefit of an increased rate increase later on.

There are penalties on pre-maturity withdrawal of FDs, and thus you miss liquidity in longer duration deposit schemes. Let’s understand laddering with an example.

Say you want to invest Rs 4 Lakhs in Fixed Deposits. Now rather than booking a 5 year FD for 4 Lakhs, you can choose to invest Rs 1 Lakh in 1 year FD, Rs 1 Lakh in a 2 year FD, 1 Lakh in 3 Year FD and Rs 1 Lakh in a 5 Year FD respectively. At the end of every year, you can step up the ladder by renewing the FD at a new rate. This will give thorough liquidity as well as the opportunity to tap the benefit of an improved rate of return.

2. Know about the tax benefit

Do you know that an FD of 5 years brings a tax benefit along? You can avail of deduction under section 80 (C) of the Income Tax Act.

The RBI has yet again slashed the repo rate, it is expected that FD rates would further go downwards. Already many banks have reduced FD rates, yet you can still get a 6-7 % annual yield with a five year FD. If you want to seal an FD for a long duration during this COVID uncertainty, a tax-saving FD is certainly a good deal.

3. Explore products like a sweep in FDs

There are many types of FD products available varying from 7 days to 10 years available with your bank. So, choose the tenor according to your need. If you are seeking more flexibility, consider opting for a sweep in option as well. This is as flexible as a recurring deposit scheme. Here in the surplus from your Savings Account will be periodically swept into a fixed deposit account. As FD interest rates are higher than Savings Account, these are good ways to make better interest on our ideal money. There are no early withdrawal charges, and thus you also enjoy the liquidity of a Savings Account.

Don’ts

4. Don’t liquidate existing FDs

Amidst COVID 19 induced disruptions on your job/business, if you are seeking some additional cash, refrain from liquidating your FD. You will be charged a premature withdrawal penalty and will also lose a high rate yielding deposit scheme. Instead, you can consider availing a Loan against FD, which is available at a nominal interest rate of 1 %.

5. Don’t buy all FDs from a single bank

Most of the time, we choose to invest in FD Schemes offered by our bank. However, it is not the right approach to invest your money. You should shop around and choose the best rate available with any of the trustable financial institutions. For instance, Most of the leading banks offer a 3-6 percent return on FD, while the small banks and NBFCs are offering over 7-8 percent on several schemes. You should choose the best rates from different banks & institutions. It is recommended to opt for banks with Crisil’s FAAA/ FAA rating and A1+ rating for long-term and short-term deposits, respectively.

6. Don’t overlook asset allocation

A right portfolio is the one that is based on asset allocation which is determined as per the investor’s income, cash flows, risk appetite and goals. Thus it is strictly recommended not to put all apples in one basket. You should stick to your asset allocation and review & rebalance portfolio annually. If you do not take a risk, you probably would never gain with the market movements.

FDs are ideal for capital security as they offer much-needed protection against market volatility when your goals are near. Using your FD base according to asset allocation, will ensure that you are never away from your goal.