Investing your money in a fixed deposit is a good idea. However, if you want to get the best benefits, you need to select a suitable type. There are several types of fixed deposits that you can get in India. Let’s first consider the main categories. Then, we can go on to see which one could be most suitable for you.
Types of Fixed Deposits
There are two primary types of fixed deposits, which are long-term and short-term fixed deposits. Here are the main types of fixed deposits you can find in India:
Bank Fixed Deposits
This type of fixed deposit is offered to an existing bank customer. Bank fixed deposits typically have low FD interest rates.
Company Deposits
Company deposits, also called corporate FDs, are usually available with non-banking financial corporations (NBFCs). You can expect higher interest rates, but ensure to invest in companies with a good credit rating.
Cumulative Fixed Deposits
Here, the interest is available in maturity. There is no pay-out in between. The tenure for cumulative fixed deposits is longer and may extend from one year to five years.
Non-Cumulative Fixed Deposits
Here, you get paid by the financial institution at regular intervals against the money deposited. It is a good option for pensioners who need weekly, monthly, or quarterly income.
Tax Saving Fixed Deposits
This category of FD has a typical tenure of 5 years. There is a tax benefit attached, up to ₹1.5 lakhs, for a particular tax period. However, there is a lock-in period, so you cannot access your money or take it out early.
Senior Citizen Fixed Deposits
Those above 60 years are eligible for these accounts. A senior citizen fixed deposit provides a higher interest rate, helping older adults meet their expenses when they no longer earn a monthly income through employment.
NRI Fixed Deposits
This type of fixed deposit is subject to market fluctuations but provides higher FD interest rates. This type of account is open to Indians living and earning overseas and to People of Indian Origin (PIOs).
Which Type of FD is Best for You?
By reading so far, you probably have an idea of the type of fixed deposit that suits your requirements, according to your circumstances. If you’re still confused, given below are a few more details.
Short-term Fixed Deposits
A short-term fixed deposit can be anything from 7 days to 2 years. Generally, the minimum amount you can deposit is ₹10,000. A bank fixed deposit would be the best option if you are looking for a short-term investment but aren’t worried about the interest. You might need a lump sum in a few months to maybe up to a year ahead.
If you want a higher interest, you can invest in a company deposit, but be wary of the credit ratings of the companies involved. If you are working abroad, then an NRI fixed deposit is the ideal investment. You can also benefit from the slightly higher interest rates of an NRI fixed deposit.
If you earn a good salary, a tax-saving fixed deposit can help you save a bit on the income tax.
The main benefit of a short-term FD is that it is relatively safe from fluctuating market forces. However, the returns of short-term fixed deposits are low, and they are taxable.
However, these accounts are ideal for short-term savings for buying a vehicle or when saving for a holiday. You will end up with a bit more money than you would have had if you had accumulated it in a regular savings bank account.
Long-Term Fixed Deposits
As you grow older, you start looking at bigger expenses like buying property, paying for a child’s education, or marriage. These are huge expenses, but you may need the money several years into the future.
In the scenarios above, cumulative fixed deposits and senior citizen’s fixed deposits are the types of long-term investments you can opt for.
Since the interest rates and tenures of fixed deposits differ from one financial institution to another, you should shop around a bit to get good interest rates. Also, investigate the level of liquidity so that you can be sure of accessing your money when you require it.
Conclusion
Using a ‘mix and match’ formula is a good approach to balancing your investments in fixed deposits. This means that you should put the money you invest into a healthy mix of long-term and short-term investments in your fixed deposits.
Then, if you invest in the right fixed deposit type, you can maintain an equilibrium between high-risk, medium-risk, and low-risk investments to keep your money safe and available when you need it at the right time.
