Investors of all experience levels find great success with fixed deposits. They have been popular among investors with a low to moderate tolerance for risk for many years. Their appeal stems from the fact that they provide guaranteed returns, are simple to open and liquidate, and are trustworthy.
The size of your returns from fixed-deposit investments is, however, heavily dependent on the investment strategy you choose. The returns on fixed deposits may be increased significantly with the appropriate strategy.
7 Best Fixed Deposit Strategies
Here are several fixed deposit techniques that might help your money increase over time.
1. Diversify with Corporate FDs
When compared to bank fixed deposits, corporate fixed deposits in India are still in their infancy. The interest rates paid on corporate FDs are 1% to 4% higher. These are made available by banks, credit unions, and other financial institutions with the legal right to issue fixed deposits.
Returns during the maturity period show a considerable difference, even if 1-4% may not seem as large at first.
Additionally, a higher interest rate will significantly improve your savings if the investment corpus is large. Therefore, with the high inflation rate, corporate fixed deposits are an excellent strategy to save money.
2. Check Credit Ratings
A fixed deposit’s safety may be gauged in part by looking at its CRISIL and ICRA credit rating. If a fixed deposit has a good rating, it is a secure bet for investors.
Larger risk does indeed provide larger returns, but the best-rated deposits give somewhat lower rates of return than the lowest-rated and most dangerous options. However, in the pursuit of profit maximization, safety and dependability must be neglected.
Choose securities with excellent credit ratings and evaluate them in light of your investment objectives and risk tolerance.
3. Compound for Tax-Free Growth
Many beginning investors misunderstand the impact of compounding. While receiving interest payments regularly may seem preferable, receiving them at maturity allows your savings and interest to continue to grow tax-free. In this method, your income will increase, allowing you to make more money overall.
4. Consider a Loan over Selling FD
At any moment, a dire situation may emerge. It’s tempting to cash in on your fixed-income investments before they’ve had a chance to generate any return. For violating the commercial contracts, you will also be required to provide restitution.
Your FD may have an overdraft provision to help you weather unexpected expenses. You may take out a loan on your FD and just pay interest on the money you borrow plus the number of days you borrow it. In some businesses, you may get an overdraft of up to 75% of the initial investment.
5. Manage Risk and Deposit Insurance
With so many financial institutions failing and going through crises, it’s important to accept that each asset class has some degree of peril. Despite their reputation as the safest investment option, FDs still carry some risk. The deposit insurance limit will rise to Rs. 5 million in the 2020 budget.
To reduce potential loss, it is recommended that no more than 5 lakhs be placed in fixed deposits by each family member. In the event of an emergency, it is recommended to open the FD in either/or survivor mode.
6. Optimize with Shorter Durations
Companies and financial institutions typically provide higher interest rates for longer terms since they may put the money to better use throughout that time. That’s why it can make sense to go for lengthier terms. But there’s also the fact that historically speaking, interest rates have risen when inflation has increased.
Therefore, it could be prudent to invest for shorter periods of time and then reinvest when interest rates rise. Your fixed deposit’s duration should reflect the time frame during which you want to achieve your goals.
7. Maximize Profits with Laddering
Laddering your fixed deposits is a great way to maximize your earnings, take advantage of rising interest rates, and maintain easy access to your money.
The current economic climate is a prime illustration of the folly of such a course of action. Banks are gradually increasing their FD interest rates.
Illustrative Example: Maximizing Returns with Laddering
Examine this real-world illustration to learn how the laddering approach operates.
Let’s say you have Rs. 5,000. Put all of your savings into a single FD and lock in your low-interest rate for the next five years. It will be a major setback if the rate goes up the following year. If a medical emergency occurs during those five years, you will also be in a bind financially.
If you want to invest Rs 5,000,000 over several years, you can use the “laddering strategy” to do it. Take, as an easy hypothetical, five individual deposits of Rs. 1,000,000. These deposits might have terms of 1, 2, 3, 4, or 5 years. Next year, after the first 5-year deposit matures, you can reinvest that money.
This cash will be invested to earn the highest possible interest rate. There’s no need to worry about fees or interest losses associated with breaking a large deposit, so you may access this sum whenever you need it. The money should be reinvested after the second, third, fourth, and fifth years as well.
The same amount will remain invested each year if you don’t touch it, and you’ll have access to it whenever you need it at year’s end. You can also escape the stress of trying to time the interest rate cycle and secure maximum profits.
If you want to take advantage of the annual tax savings allowed by Sec 80C, you can also “ladder” tax saver FDs.
Alternatively, you can diversify your FD amount among other banks and companies to strike a better balance between risk and return. This is because certain companies with large returns are less reliable than banks or companies with lower yields.
Conclusion
Implementing these tactics for fixed deposits can enable you to make well-informed choices on your investments. It is essential to customize your plan according to your financial objectives, whether you are investigating corporate fixed deposits or thinking about the laddering approach. Keep in mind that there are benefits to each approach; pick intelligently to see your fixed deposits grow.