Traditionally, fixed deposits have been considered the investment vehicle for investors with little or no risk appetite. But things have changed with the passage of time. Financial markets have become more mature and now offer a much greater variety of investment avenues. Despite this, fixed deposits have not lost their relevance. On the contrary, they are now considered a pivotal investment instrument by a much broader investor base.
The shaky stock markets have renewed investors’ interest in fixed deposits. These instruments lend stability to an investment due to the assured returns that they offer. As a result, they form an integral part of the portfolios of even the most high risk investors.
The minimum sum that can be invested for some specific schemes is as low as Rs100 making it ideal for small investors. The high inflation rates and the resultant hawkish monetary policy have led to higher fixed deposit rates, further enhancing their ‘attraction’ quotient.
Most banks offer the automatic renewal option, best suited for investors who seek higher rate of returns. Under this facility, the interest is compounded quarterly and reinvested along with the principle amount. The automatic maturity of term deposits ensures that the investors don’t lose a single day of earning interest.
Investors who wish to park large funds in some short term avenue until they decide how it should be allocated among various asset classes find fixed deposits ideal. This is because it enables them to enjoy better interest rates as compared to a savings account while their capital remains intact
Moreover, there is greater flexibility in terms of the maturity periods on offer, ranging from a week to up to 10 years. For those who formally perceived fixed deposits as illiquid, the availability of overdraft facilities has brought about a change in perception. Loans can be availed against these deposits while interest continues to be accrued. Further, with facilities such as sweep-in-sweep-out accounts on offer, liquidity no longer is a major concern.
Senior citizens enjoy higher interest returns on fixed deposits than others. For instance, Bank of India offers 0.5% higher returns than card rates on deposits of maturity periods of 6 months and longer to senior citizens. State Bank of India has revised its slab as follows: Fixed deposits also offer a regular stream of income through the options of receiving interest on a monthly or quarterly basis, as per requirements. Moreover, with no or less taxable income, FDs can be a tax-efficient method of investing.
Certain fixed deposits are entitled to income tax exemption up to a limit of Rs1 lakh, under section 80c. These deposits should be locked in for a period of five years to qualify for the benefit and no withdrawals before maturity are permissible. With financial markets evolving continuously, a new-age investor, who considers fixed deposits as plain vanilla products with implied generation gap in their offerings think again. There’s something in it for everyone.