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When Investing in an FD, Look Beyond Just Interest Rates

By net asset value, no other investment instrument beats Fixed Deposits in India. We Indians love this good old investment option, and it does not seem as if that is going to change anytime soon. So, even though the OneInsure Research Desk strongly suggests you opt for next-gen investment tools like ULIPs or Mutual Funds, this article will talk about 6 factors that you must consider besides interest rates when investing in Fixed Deposits.

Auto-sweep FDs

This unique feature is available in most national-level banks. Through the auto-sweep mandate, you can instruct your bank to send all the funds above a particular threshold amount on a specific date every month into a pre-designated FD. For example, you can instruct your bank to auto-sweep your account on the 20th of every month and send all funds above Rs 20,000 into an FD.

Suppose you had Rs 27,000 in your account when the monthly auto-sweep took place. Two days later, on the 22nd, you issue a cheque for Rs 25,000. In this case, Rs 5,000 will return from your FD to ensure the cheque is honored. The same is true for debit card transactions.

Maturity Term

The maturity term should be well thought out. Plan beforehand what your major expenses are going to be for the next 5 – 10 years and decide your FD’s term accordingly. It is not a good practice to break FDs for other expenditures. Examples of major expenses are your child’s college tuition fees, new car, family vacations, and so on. For emergencies, you need to maintain an emergency fund.

On the same point, when opting for an FD, check to see which bank is providing the highest rates for the longest term. As you may already know, the rates of FDs keep reducing year on year. In such a scenario, if you find a bank that is ready to fix its FD rate of interest at close to 7% for 1,051 days (three years), go for it.

Is Your FD a Tax-saving FD?

If your Fixed Deposit is tax saving, then a lock-in period is applicable. Although it is common practice for Indians to invest in tax-saving FDs at the last minute towards the end of the financial year, always be wary of how much money you are putting into these instruments. You cannot withdraw from them and more often than not you cannot procure a loan against them either.

Type of Institute

If a financial institution is offering FDs at such a great rate of interest that it is too good to be true, it probably IS too good to be true. You would be wise to stay away from such get-rich-soon scams. Investing in an FD with a reputed financial institution ensures your money is safe, the transaction is transparent, and you have the option to stay invested in FDs after the term of your current FD is finished without losing any compounding benefits.

Should You Invest in an FD through a Close Relative?

Several institutions offer a higher rate of interest if the FD is opted for by a senior citizen. An extra 1% on an FD of Rs 5 lakhs is a significant sum of money. So, this is something you can explore as well before investing in an FD. Besides, it reduces your tax burden too. Of course, only close and trustworthy family members should be selected for this.

Loans and Credit Cards against FDs

Most reputed financial institutions that offer FDs also give the customer the option to avail loans after a set period of time against their investments. Customers also receive a personal-use credit card. If this is something that appeals to you, you should consider opting for FDs from institutions that offer these added benefits.

In conclusion, we would still suggest you choose ULIPs over Fixed Deposits because the former offers a number of additional advantages, including a significant life cover, which FDs don't. Check our piece Better and Beyond Fixed Deposits and we're sure you will be convinced. If you still have further queries, whether they are pertaining to Fixed Deposits or ULIPs, shoot them in the Comments section below; we will be happy to answer them! 

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