When Is The Right Time To Invest In Fixed Deposits?
Even though your FD comes with a safety guarantee, you may be thinking of whether it is the right option for you today. One of the factors sure to be weighing on your mind is inflation, which affects your investment in two ways. One, it may result in the appreciation or deterioration of your capital interest. Two, it could lead to a rise or fall in future interest rates. So you may be wondering, when is the right time to invest in an FD?
Knowing about these four factors will help you think about your fixed deposit investment more clearly.
- Falling interest rates scenario: Fixed deposits as a financial instrument have been a hit all through the years due to the high interest rates that banks and NBFCs offer on them. However, from 2012 onwards, the Reserve Bank of India has cut the repo rate and the cash reserve ratio many times.
The repo rate is the rate at which the RBI lends money to banks which come under it. So if the repo rate is hiked it means in all likelihood that the interest rate on your FD will also increase.
If the repo rate is slashed, expect to earn less on your FDs. When it looks like the interest rates are gradually going downhill, it is better to immediately invest in FDs, and keep them locked for a certain number of years. A good practice is to keep the FDs locked for a longer period if the interest rates offered beat the inflation figure.
- Benefits of laddering: Interest rates keep fluctuating over time. There is always the danger that your FD could remain stuck at a lower interest rate for a long period of time when the prevailing interest rates have improved. Laddering is what helps to avoid such a scenario.
Instead of putting all your fixed deposit in one lump sum, you can stagger it in FDs of various tenors. You could even start FDs in different financial institutions. This gives you a better opportunity to reinvest them at the prevailing market rates, thus ensuring that you gain both appreciation as well as liquidity.
Doing this over the long term gives you a higher average return. This strategy is similar to the systematic investment plan used in mutual fund investments where investing at different net asset values helps to increase your return on investment.
- Power of compounding: It is prudent not only to go for FDs of various tenors, and across different financial companies, but also fixed deposits where the interest is compounded on shorter period. You can opt for two kinds of FDs. The first one is called traditional or non-cumulative plans and the other one is called reinvestment or cumulative plans.
Under the non-cumulative FDs, the principal is invested according to the tenor chosen by you, and the interest is credited either monthly, quarterly or annually. In cumulative FD, the interest is compounded on a quarterly basis and reinvested along with the principal. This works out to give you a higher pay-out.
Also Read : A Complete Guide to Income Tax on Fixed Deposits
- Taking taxation into account: Both bank and company FDs are tax adjusted—they are not tax-free. Whatever income you make from FDs, you have to pay tax on them depending on which income bracket you fall under. There may be scenarios where fixed deposits do not always give inflation-beating returns. So, it may be a better idea for you to choose short-term FDs. The longest tenor on a short-term FD is five years, and if you invest in this FD, you are entitled to a tax deduction under Section 80C.
Follow these essential guidelines, and choose fixed deposits of trustworthy financial institutions. Bajaj Finance Fixed Deposits have high stability rating from two top-most credit rating agencies—ICRA and CRISIL.