Saturday, October 9, 2010

Short note on Fixed Deposits

Fixed Deposits in India give returns of about 8-11% per annum. Inflation in India is around 8-9% and the interest from FD’s is taxable – hence FD’s cannot be used as a tool for wealth creation. However, FD is a good investment option for wealth preservation. Hence at the stage where you are, the wealth creation stage, FD’s are not the best option to invest.  And for people at the wealth preservation stage – the retirees for example, FD is a good option.
Having said that let me share with you few salient details on FD:
  1. Traditionally, fixed deposits, as the name suggests, earned interest at fixed rates. However, recently this has changed. Now every bank has to declare a base rate every quarter (based on their cost of capital and other economic factors) – and the interest on all the existing FD’s would be linked to this base rate. Hence the FD is now technically a Floating rate deposit.
  2. Each depositor in a bank is insured up to a maximum of Rs.1,00,000 for both principal and interest amount held by him. Hence there is safety till Rs 100,000 in the FD’s if the bank folds up.
  3. Investments in fixed deposits up to a maximum of Rs.100,000 for 5 years are eligible for tax deductions under section 80 C of income tax act.
  4. Fixed Deposit tenures can be as low as 7 days and the minimum amount can be as low as Rs 100.
  5. For FD’s more than 15 lacs, the interest is decided daily by the banks.
  6. While investing in FD’s one must look at the charges that will be levied in case of premature withdrawal.
  7. Also we must appoint a nominee as a best practice when we invest in an FD.
  8. Corporate deposits compete with bank FD’s and they tend to give a slightly higher rate of interest as there is a slightly higher risk in this case.
  9. Then there are Mutual funds that invest in Debt instruments – these do not commit returns unlike FD’s but they are more liquid than FD’s