When you SHOULD invest in Fixed Deposits

Okay okay. I’m sure you’re all going to be like “Ankur, you’re the one who keeps telling us that Fixed Deposits don’t give good returns, and now you’re saying that you should invest in FDs? Are you OK?”

Yes. I’m fine.

I’m not saying all your money should be invested in Fixed Deposits, but they can be considered in certain situations, which I’ll describe below:

1. You want the money to be risk-free. Fixed Deposits are generally risk-free (unless you’ve made an FD with a bank like PMCB, where people had a hard time getting it back. But these situations are rare and happen very, very infrequently)

2. You don’t want volatility. Okay, what is volatility, you ask? Volatility is basically fluctuations in the value of your investment, which typically happens if you invest in the stock market, equity Mutual Funds, or any other equity-based product (because share prices of companies keep changing). When you don’t want anxiety because of the ups and downs in the value of your investment, FDs are a good choice, because they offer a FIXED rate of return. Please note that there are better products which offer a fixed rate of return as well, but a Fixed Deposit is one such option

3. When you have a fixed duration in mind. If, for example, you want a risk-free option to put your money for 2 years. That’s when a Fixed Deposit can help

Now, just because these are 3 situations where a Fixed Deposit can be done, does not mean that it must be done. Like I said, there are a lot of other options that you can look at, like bonds. We’ll cover bonds in another post sometime soon, but just to get an idea of what bonds are, it is like an agreement between you and an entity (a private company, government company or the government itself), stating that you are lending money to the entity for a certain time period, and the entity will pay you an interest on the amount every year, and repay the amount to you at the end of the said duration.

While bonds are a good investment option, they’re a bit complicated to understand, so a lot of people opt for Fixed Deposits.

However, if you’re opting for a Fixed Deposit, you can keep a few things in mind:

1. Look at the rate of interest and compare different banks. 99.9% of private and public sector banks are safe. So choose one that offers a good interest rate

2. Check the penalty that the bank is charging for pre-mature withdrawal. So if you do a Fixed Deposit for 5 years and want to withdraw after 2 years, the bank will charge you a penalty (which is generally a small percentage of the investment amount). Check out how much this is. Don’t opt for a bank that has a high penalty charge

3. A good hack would be to split your investment amount into 2-3 smaller amounts and do an FD. So if you want to invest, say 1.5 lakhs, then split it into 3 FDs of 50,000 each. Now, if you ever need 1 lakh rupees, you’ll only have to break 2 FDs and pay penalty only on those two, instead of breaking the entire FD of 1.5 lakhs and paying a higher penalty

4. Look for other companies that offer FDs: Some NBFCs like Bajaj Finance, PNB Housing Finance etc offer Fixed Deposits as well, at a slightly higher interest rate compared to what banks offer. Also, some Small Finance Banks (SFB) offer FDs at better interest rates. Now, an SFB is a different kind of bank that mainly serves MSMEs, small farmers and under-served segments. However, these banks are also regulated companies, regulated by the RBI. So they may not be as risky as you think they are. Check for NBFC and SFB Fixed Deposits and what interest they offer.

5. When looking at corporate FDs, check out the rating. FAAA and MAAA rated FDs mean they have a high credit rating, which means they're relatively less risky. While this may depend on your risk appetite, you should pay careful attention to FDs that have a rating lower than AA

6. Senior Citizens get better interest in most banks. So check the rates if you’re making an FD for a senior citizen.

The idea is to compare the rates, prices and processes of different banks, and THEN invest in a Fixed Deposit.

Also, like I’ve mentioned earlier, a Fixed Deposit is not an investment. It’s just saving your money. FDs won’t help your money grow, but they’ll definitely keep it safe!

So analyze your finances, be sure of your goal and then opt for the right Fixed Deposit if you want to!

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