Are you among those individuals who think investing in a fixed deposit is a safer and guaranteed way to generate income? If yes, then you are not wrong!

This traditional investment option is popular for generating steady but assured returns. In fact, financial experts deem fixed deposits suitable for risk-averse individuals. It also comes in handy for building an emergency corpus or even a retirement fund.

Usually, you find several articles highlighting the features, benefits and drawbacks of investing in fixed deposits on the internet. However, in this particular one, we will try to cover the aspect of – how to invest in FDs and what you should consider before doing so.

On that note, read on to find more!

Steps to Invest in Fixed Deposit

Before we proceed to find out the steps involved in investing in an FD, you must understand that a fixed deposit serves as an ideal avenue to park surplus money. In fact, it is an ideal option to preserve capital at hand. Here’s how you can start investing in FDs.

Step 1 – Check and compare FD interest rates

You must note that the rate of interest offered on FDs tends to vary from one financial institution to another. For instance, when compared to commercial banks, NBFCs and small finance banks may extend a higher rate of interest. Further, senior citizens are entitled to receive additional interest on their investment.

This table below offers a fair idea of the difference between the rates extended to a regular depositor and senior citizen for a tenure of 60 months –

Financial institution Present FD rates FD rates for senior citizen
SBI 5.4% 6.2%
Axis Bank 5.5% 6.15%
ICICI Bank 5.5% 6.3%

So, to generate higher earnings look for a financial institution that offers a high FD rate. However, don’t forget to weigh in other vital factors and terms of service before investing in any FD scheme.

Step 2 – Pick suitable deposit tenure

Usually, an FD scheme comes with a tenure ranging from 7 days to 10 years.

Based on your requirement, you should proceed to select a suitable deposit tenure. Typically, financial experts suggest laddering FD across different tenures to spread out interest rate – related risks and also to facilitate liquidity.

In case you plan on parking your money into an FD scheme for a significant period, consider investing in a 5-year tax-saving FD scheme. Typically, such a scheme helps to save tax under Section 80C of the ITA.

Step 3 – Choose a frequency of interest pay-outs

Once you have decided the FD tenure, proceed to select the frequency at which you would like to receive interest pay-outs. Generally, you have the option to choose from any of these following –

  • Monthly
  • Quarterly
  • Half-yearly
  • Annually

If you are not looking for immediate earnings, you may also consider choosing the reinvestment FD mode.

Such a facility will allow you to reinvest your earnings after being compounded quarterly and will, in turn, be paid out on maturing with the invested principal amount. So, choose a pay-out frequency based on your end goal.

Step 4 – Select a mode of deposit

Lastly, determine which mode of deposit is most suitable for you.

Most financial institutions allow FD holders to make their deposit via internet banking or by simply visiting their nearest branch.

Once you are clear about these, you can proceed to fill out an FD application form and subsequently invest in a scheme.

Regardless, make it a point to become familiar with a few vital aspects to streamline investments in such a scheme.

Also Read: Invest in FD on Groww

Things to Consider Before Investing in a Fixed Deposit

Like discussed, check these following beforehand to facilitate a smooth investment experience –

  • Availability of premature withdrawal facility

Before investing in FDs, you must find out if you can avail of the premature withdrawal facility. Generally, closing an FD account or withdrawing partially before the completion of tenure attracts a penalty. For instance, in the case of partial withdrawal, FD holders attract a penalty of 1% on the applicable rate.

  • The safety aspect

In most situations, FDs offered by commercial banks are insured under DICGC or Deposit Insurance and Credit Guarantee Corporation. The DICGC rules state that the principal and interest amount of each bank FD depositor is insured up to Rs.1 lakh.

Even though cooperative banks tend to extend a higher rate of interest, in terms of safety and issue credibility choosing a commercial bank seems more viable.

So, before investing in an FD scheme, make sure to find out about this aspect in detail. 

  • Taxability

Did you know that the interest earned on fixed deposits is fully taxable?

To elaborate, you will have to pay taxes on FD returns as per your tax slab. Furthermore, if your earnings on FD exceed Rs. 40,000 in a fiscal year, you will have to pay 10% TDS on it.

Notably, for senior citizens, the threshold is Rs. 50,000. In case, your annual income does not come under the tax bracket, you can avoid TDS deductions on FD by declaring the same through Form 15G or Form 15H (senior citizen).

But, if you plan on investing in tax-saving FD or 5-year FD, then you will be entitled to claim a deduction of maximum Rs. 1.5 lakh in a fiscal year. Regardless, you must note that such FDs come with a lock-in period of 5 years and do not permit premature withdrawal.

On that note, make an informed decision in terms of your choice of FD scheme.

  • Suitability 

As per popular notion, investing in fixed deposit is deemed suitable for –

  • Retirees who rely on pension and interest income.
  • Individuals who have surplus cash at hand at the moment and would like to mobilise it without being exposed to market risks.
  • Individuals with short-term financial goals.
  • Those who are planning to build a retirement corpus.
  • Limitations

Investing in FDs also has its share of drawbacks, and you need to be aware of them to account for it accordingly. For instance, the earnings generated on fixed deposits are not inflation-adjusted, and they attract taxation annually. These make a fixed deposit a less attractive avenue for wealth creation. However, FD investments are completely safe and guarantee returns irrespective of the market fluctuations.

In conclusion, we can say that if you have some extra cash in your hand and do not need it immediately, you should park it into an FD by following the steps that we just discussed. Doing so, you will prevent your capital from eroding and also earn a steady return on the same.

Happy Investing!