A Fixed Deposit Money Investments instrument in which your money stays put without fluctuating with the market. This is a safe and stable form of investment because it offers a fixed rate of interest throughout the tenure of the investment. You can use the money you deposit in your FD to access credit through an overdraft facility. During the time you use the loan, your FD amount earns interest. But before you borrow money from a bank or a lender, make sure you understand the various aspects of Fixed Deposit.
Interest rate
Fixed deposit rates have been at multi-year lows over the past few years. This is the result of banks slashing rates and the Central Bank attempting to balance inflation and economic growth. However, the interest rate cycle is reversing and short-term rates will increase first before long-term rates do. However, there are a few smart moves an investor can make to make the most of this time.
A fixed deposit is a type of savings account that allows you to invest a lump sum amount with a financial institution for a predetermined period. This amount is then invested in bonds, mutual funds, or shares. In contrast, money invested in a savings account earns lower interest rates because it has a much longer term. However, a fixed deposit offers greater certainty. With a higher interest rate, FDs are a safer way to invest your money than savings accounts.
Lock-in period
The term “lock-in period” refers to the time frame during which the money invested in an FD account is not available for withdrawal. In general, the length of this period equals to the deposit tenure or maturity period. Generally, you cannot withdraw the money from an FD account before this time, but you can withdraw it before that date if you pay a penalty. However, some FD schemes do not have any lock-in period.
The lock-in period is also called the lockup period. During this time, you cannot sell your investments, but you can keep them to grow. While this term doesn’t determine the longevity of an investment, it does give you the opportunity to evaluate your investment and make adjustments. This type of investment is particularly beneficial for investors who have a long-term investment plan and want to make sure they are making the right choices.
Term deposit
Term deposits are a good choice for people who want to invest money for a certain period of time, usually five years. You can renew these deposits year after year, earning interest while your funds stay safe. It is a good option if you plan to use the money to fund a vacation or for a major emergency. Aside from its tax benefits, term deposits also offer better interest rates than savings and chequing accounts.
Term deposits are similar to bank accounts, but the application process may be easier if you are already an existing customer of a bank or financial institution. Decide how much money you want to invest and complete the application form. Then, choose a provider and begin investing! However, keep in mind that there are some key differences between fixed and variable rate term deposits. Some providers may require you to have a linked transaction account, which could cost you a small amount of money. Other institutions may require you to pay a fee to receive interest on the term deposit.
Taxation
Fixed deposits are a great way to earn fixed income, but taxation is an issue you should understand. Your interest income from your FD is taxable as per your tax slab. However, if you’re a senior citizen, you can get up to Rs 50,000 tax-deduction under Section 80TTB. You can use your tax-deduction amount to compare your post-tax interest income from FDs to other forms of fixed income.
FDs are taxable in your hands, whether you receive it as interest or as capital gain. You can choose to have your interest taxed in the year that it accrues or in the year it is received, depending on your accounting method. The payer of your interest will deduct tax from the interest and issue a TDS certificate. In some cases, you can even place your FD jointly with someone else to defer tax liability.
Capital protection
While investment in fixed deposit schemes is a safe bet, you should always look for ways to increase capital protection. This is because you may have to bear some losses due to equity market fluctuations. A well-designed capital protection portfolio is balanced by ensuring that the debt component is kept below 85 per cent and the equity portion is above 15 per cent. By following this strategy, you can ensure that your capital is protected. And, even if your money is invested in a high-risk instrument, you will still enjoy tax benefits as you would in debt mutual funds.
However, a closed-ended fund with capital protection as its primary objective is not very good at guaranteeing capital. You may find that you can exit from the fund early but it is difficult to earn additional returns. Moreover, you are not guaranteed a return, unlike with an open-ended fund with no lock-in period. Moreover, the fund managers may reduce the credit quality of a fixed deposit scheme to increase returns and attract investors. This could lead to default of the issuer.
Safe investment
A high-yield savings account is the gold standard for safe investment. You get strong returns with little or no risk. Additionally, money in most banks is insured up to $250k, making these accounts very appealing to conservative, low-risk investors. Here are some things to consider when choosing a high-yield savings account. A: The longer the term, the higher the rate of return. Additionally, money in a savings account is insured by the Federal Deposit Insurance Corp.
Another option is a money market account. Although money market accounts are FDIC insured up to $250,000 per person and per bank, they carry some risk. Money in these accounts may not appreciate as much as you expected and could lose purchasing power over time. An annuity is an agreement with an insurance company to pay income to you over time in exchange for an upfront payment. There are different annuities, so make sure to read up on the terms and conditions of the plan before making a decision.