4 Factors to Determine the Ideal Fixed Deposit Tenure

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Since time immemorial, bank fixed deposits (FDs) have been one of the most popular types of investments in India. FDs offer a fixed return on your investments and are immune to market volatility. Over the last few years, bank FD rates have gone up. Choosing the perfect deposit term is among the several aspects of investing in fixed deposits. So, how do you go about ensuring the perfect term? Let’s find out.

Essential things to keep in mind while opting for the perfect term

Opting for the proper term for your fixed deposits is a culmination of several factors. Some of the critical things you need to keep in mind are as follows:

The time you need the money

This is one of the most crucial factors determining your deposit's tenure. Choose a one-year deposit term if you need the money within one year of investment. Similarly, if you need the money five years later, keep the deposit term for five years. Generally, short-term goals like accumulating funds for vacation require money within a year. On the other hand, medium-term goals like accumulating funds for a home's down payment require money in three to five years.

Similarly, if you are investing in a fixed deposit to build a corpus for your child’s higher education, which is generally more than 10 years and above, opt for a 10-year deposit term. Simply put, evaluating your financial goal and opting for the deposit term is essential. Make sure to opt for a term which gives you money when needed. Map it with your financial goals to get the most out of it.

Keep a close eye on interest rates

This is another vital consideration. Assured return on investment is one of the most significant benefits of investing in a fixed deposit. Note that once you lock your money, the deposit will earn an interest as offered at that time. Even if interest rates increase later during your existing deposit’s tenure, your deposit will not earn higher rates. Hence, you need to keep a close watch on interest rates.

Note that bank FD rates differ based on the key monetary policy rates, such as the repo rate, set by the Reserve Bank of India (RBI). The repo rate is the rate at which RBI lends to other banks. If RBI increases repo rates, it becomes expensive for banks to borrow money. In such a scenario, bank FD rates go up.

Banks do this to attract deposits. Similarly, if the repo rate decreases, bank FD rates also decrease. As an investor, you should monitor the prevailing interest rates and lock your money when rates are high. This is a smart way to earn more returns on your investment.

Understand charges on premature withdrawals

You must pay a premature withdrawal penalty if you break your fixed deposit before its tenure. In some cases, you might need money before the end of the deposit term. Therefore, a key consideration while determining the deposit’s term is understanding the premature withdrawal charges. Generally, the higher the deposit term, the higher the penalty and vice versa. This varies across different lenders, from national banks to small finance banks.

Before committing to a particular term, ask yourself these questions:

·         What are the chances of your requiring funds before the deposit matures?

·         Do you have any alternatives if you need funds before?

Satisfactory answers to these questions can aid you in zeroing in on the right tenure and minimise the chances of premature withdrawals.

Evaluate the tax implications

Tax consideration often takes a backseat while determining tenure on fixed deposits. However, you should not neglect it. Note that the interest you earn from your deposit is fully taxable under income from other sources. It means it gets added to your overall income, and you need to pay taxes based on the tax slab you fall under when interest income crosses a certain threshold.

Hence, you must evaluate the tax implications when choosing your deposit’s tenure. Suppose you feel your tax implications can go up due to the addition of the interest income received from your deposit in a certain year. In that case, choosing a tenure for your deposit is wise when your overall tax liability is low. Note that any money saved from the taxman through legal ways is money earned. Considering your tax liability goes a long way in opting for a suitable tenure.

Laddering - a simple way to invest in fixed deposits across tenures

While you can invest a lump sum of money in a single deposit, it is wise to adopt the laddering strategy to invest in multiple deposits across tenures. This can help you earn more from your deposits in case interest rates rise. Through laddering, you can get money on a regular basis. Let’s understand this strategy with an example.

Suppose you have ₹ 10 lakhs to invest in a fixed deposit. Instead of putting the entire money in a single deposit, you can divide it into ₹ five lakhs each and invest in two deposits across one-year and two-year tenures. This will ensure you have money at the end of one and two years, and if rates go up at the end of one year, you can use the money to lock in a deposit at a higher rate.

In conclusion

Keeping in mind the above factors will help you choose the suitable tenure for your fixed deposit. Ease of investment and quick liquidity are the hallmarks of fixed deposits. Having them in your investment portfolio gives you peace of mind as you know you can access funds whenever needed. Unity Bank offers easy and smart investment solutions for new-age customers. If you have an investible surplus, invest it in a fixed deposit today.

This article is part of a featured content programme.
Published 27 June 2024, 10:30 IST

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