You may have noticed that FDs today are either loved or completely sidelined by investors.
Before investing in mutual funds and stocks became common practice, FDs were considered the best option for steady growth. However, with rising inflation eating into the value of the returns on FDs, the ROI of these debt instruments came into question.
Lately, however, FD interest rates have turned positive after many years. This signals that lenders are offering higher interest rates that help investors earn returns that combat inflation. This highlights FDs as a viable option to introduce to your investment portfolio.
A good portfolio will have a healthy mix of different asset classes, and for the debt proportion, FD investment is a good long-term addition. This is due to its fixed-income, low-risk, and easy liquidity properties. Keep reading to know more.
Fixed Deposits: An Avenue to Strengthen Your Portfolio
In a fixed deposit, you can invest any amount (usually starting at ₹5,000) at a predetermined interest rate for a specified period. If you want to withdraw funds before maturity, a penalty of around 0.5 -1% is charged. You can invest in FDs for a duration between 7 days and 10 years.
How FDs Add Value to Your Portfolio
While building a balanced investment portfolio, you must take into account your risk tolerance, financial goals, and evolving investment interests. A clear distinction between assets should also be made to align with your short-term versus long-term needs.
Here are a few ways in which FDs bolster your portfolio, letting you build on top of a stable base:
● Portfolio Risk Reduction
FDs are not market-linked products. They are risk-free investments that are not affected by volatility, making the corpus that you set aside in FDs completely safe. Every asset category, from gold and stocks to fixed deposits and equity, plays a different role in your portfolio. The role of an FD is to bring down the collective risk of the portfolio while providing guaranteed returns.
This is reinforced by the fact that FDs come with insurance coverage. The Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI, offers protection up to ₹5 Lakhs on bank FDs. That way, even if the bank defaults and is unable to pay you, your capital investment is insured and assured.
● Diversification
While allocating assets in the debt category of your portfolio, you have to consider both short-term and long-term investments. For the short term, liquid funds are a viable option, which provide good returns even for a short investment period and are also easily redeemable.
To allocate funds in the long-term debt category, FDs are the best contenders. They provide good returns for the long term while also remaining highly liquid. This way, your debt allocation is well-diversified.
● Easy Access to Credit
You may suddenly need funds for unforeseen financial emergencies. Instead of shuffling your equity allocation by selling mutual funds or stocks, you can easily take a loan against your FD. You can do this easily online and withdraw funds as an overdraft from your account.
Lenders typically sanction between 70-95% of your FD amount, though this varies from lender to lender. The process is both simple and smooth.
● Highly Secure
While bank FDs are risk-free, company FDs mitigate your risk as they are rated by credit agencies such as CRISIL. You can assess the safety and quality of the FD scheme based on these ratings.
For example, the PNB Housing Finance FD is rated AA/Positive by CARE and AA/Stable rating by CRISIL which indicates a high level of safety. It means that the lender meets the interest and principal payments on time. The presence of such a highly secure instrument allows you to venture into riskier avenues for other segments of your portfolio.
● Long-term Goal Setting
FDs play a big part in enabling you to plan for the long term. They allow you to forecast returns with ease and plan your strategy to reinvest the amount on maturity or how to meet big-ticket items like financing a marriage. Since you know exactly how much you will receive at maturity or at regular intervals, it is easy to allocate funds as needed.
How Much Should You Set Aside in FDs
The easiest way to decide how much to invest in an FD is by using an FD calculator available on the apps and websites of issuers. This allows you to calculate the returns over a period of time based on the prevailing interest rates for different schemes and tenors.
For example, if you choose to invest ₹1 Lakh in an FD for 2 years, you can input these details into the FD calculator. If you want to receive the interest on maturity, select that on the drop-down menu, and the FD calculator will display the interest payout.
If the interest rate is 7.55%, you know you will get ₹15,670. The calculator also provides the date of maturity and the maturity amount, which in this case will be ₹1,15,670.
Now, if you are a senior citizen, you are entitled to an FD interest rate benefit of 0.25% to 0.75%, based on the issuer and the tenor. Say the deposit amount remains ₹1 Lakh for a period of 2 years. If you choose to receive the interest on maturity, the payout will be ₹16,208 at an interest rate of 7.80%.
However, you can choose to receive the interest payout quarterly, in which case the FD calculator will display interest as approximately ₹15,160 at 7.58% interest. If you choose a monthly payout, this drops further to roughly ₹15,060 at 7.53%.
Using an FD calculator gives you these numbers at your fingertips within a few minutes. This lets you avoid the hassle of manual calculations and helps you plan your investment smartly.
As you can see, FDs are highly useful investment instruments, but you should not mindlessly park all your money in FDs. Instead, use them in combination with other assets to supplement the rest of your investment portfolio.
Opt for FDs that offer high interest rates, which will give you better returns in the long term. For instance, the PNB Housing Finance FD rates for cumulative FDs booked for 60 months to 71 months is 8.91% p.a. These earnings can help you build your wealth with ease.
However, keep in mind that there are many types of FDs available in the market, such as tax-saving FDs, regular income FDs and more. Before investing, make sure to carefully assess all the rates, terms, and the CRISIL ratings. Then, make a decision that fits into your financial plans and caters to your needs optimally.
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