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7 Best Fixed Deposit strategies to follow

04 July 2022

Fixed deposits are a popular investment instrument among new and seasoned investors alike. They have been around for decades and are a favourite among investors with a low to moderate risk appetite. Guaranteed returns, ease of opening and liquidating, and reliability are some reasons for their popularity. 

However, the investment strategy deployed while investing in fixed deposits plays an important role in determining the quantum of your returns. With the right approach, you can maximize your returns in fixed deposits.

Here are some fixed deposit strategies that you can follow and grow your investment significantly over time:

  • Look beyond traditional bank fixed deposits

Corporate fixed deposits are a nascent concept in India as compared to those offered by banks. Corporate FDs' interest rates are 1-4% higher. These are offered by NBFCs or other financial corporations that have the authority to issue fixed deposits. 

While 1-4% may not seem as high at the first instance, when you see the returns over the maturity period, there is a significant difference. 

Moreover, if the investment corpus is high, a higher interest rate will give a significant boost to your savings. Thus, corporate fixed deposits are a great way to beat the high inflation rate.

  • Assess fixed deposit issuers based on their credit ratings

The credit rating issued by CRISIL and ICRA is an important indicator of the reliability of a fixed deposit. The higher the rating, the safer it is to invest in that fixed deposit. 

However, true to the adage ‘higher risk reaps higher returns’, the highest-rated deposits offer slightly lower returns as compared to low-rated and comparatively risky ones. However, one must not overlook safety and reliability to maximize returns. Opt for instruments with high credit ratings and assess them based on your investing goals and risk appetite.

  • Consider cumulative fixed deposits

New investors are often unaware of the power of compounding. While getting periodic interest payouts may seem attractive, getting them at maturity ensures that your savings and interest continue to compound. This way you grow your earnings and effectively earn more.

  • Avoid liquidating your FD prematurely, consider a loan instead

Emergencies can arise anytime. While it may seem comforting to resort to your FDs for help, premature liquidation will bite into your earnings from the sum invested. You will also have to pay a penalty for breaking the business agreements. 

An overdraft facility on your FD cushions you against these emergencies. It will allow you to borrow from your FD and pay interest only on the sum used based on the number of days it has been used. Some corporations allow you to take as much as 75% of the sum invested as an overdraft.

  • Minimize risk by working around the deposit insurance

In the light of many banks struggling and going through crises, it is best to come to terms with the fact that all asset classes come with some risk. FDs, though pronounced the safest, are not 100% risk-free. The 2020 budget has increased the deposit insurance to Rs. 5 lakhs. 

Try to restrict the fixed deposit amount per family member to 5 lakhs to minimize the risk. Choose either or survivor mode while opening the FD, so it is easier to liquidate in case of an emergency.

  • Think about the tenure of the investment carefully

Many corporations and banks offer more rates of interest for a longer tenure because they’d be able to use the money for longer. Thus, it may seem like a wise strategy to opt for longer tenures. However, another consideration is that historically interest rates rise if inflation rises. 

Thus, investing for shorter tenures and then reinvesting when the interest rates go up may be a good idea too. Depending on whether your goals are short-term or long-term, you must decide on tenure for your fixed deposit.

  • Follow the laddering strategy to maximize the returns

Using the laddering strategy for fixed deposits allows you to earn high returns, take advantage of increasing rates of interest, and access regular liquidity.

The present economic situation is the perfect example of the imprudence of such a strategy. The FD interest rates are slowly being raised by financial institutions

Let's understand with an example

Say, you have Rs. 5,00,000. Locking them for 5 years in a single FD will lock the money at a low-interest rate. If the rate increases next year, the loss will be sizable. Also, you will be stuck with no liquidity if a medical emergency arises during these 5 years.

Following the laddering strategy, you can split Rs 5 lakhs into smaller chunks and invest for different periods. A simple example would be to assume 5 separate deposits of 1 lakh each. You can keep the tenure as 1, 2, 3, 4, and 5 years for these deposits. Now, you can reinvest the amount from the first deposit for 5 years when it matures next year. 

If the rate of interest increases, this money will be invested for a higher interest. Also, if you are in dire need of money, this amount is at your disposal without the need of incurring a penalty or losing interest upon breaking a big deposit. Similarly, at the end of the 2nd, 3rd, 4th, and 5th years, reinvest the amount every time for 5 years. 

This way you will have liquidity at the end of each year and the same amount will stay invested if you do not withdraw it. You will also save yourself the hassle of timing the interest rate cycle and avoid minimum returns.

  • You can also ladder tax saver FDs and benefit from tax savings each year under Sec 80C.
  • Alternatively, you can balance risks and returns by breaking your FD amount into smaller chunks and spreading it among banks and corporations. This is because some high-return corporates aren’t as stable as banks or corporates with relatively lower returns. 
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