If you ask Indians where they park their excess funds, a majority will attest to opting for fixed deposit schemes. Here, making an FD investment is synonymous with financial maturity. If you have such an account, it can probably help you tide over periods of financial uncertainty.
Fixed deposits are investments where individuals can park a significant amount of their excess savings, and enjoy considerable wealth appreciation. These are not market-linked instruments. Thus, they do not warrant the same risks as mutual funds or equities do.
However, why exactly did this love affair between Indians and fixed deposit investments start? Why is it that the populace continues to park its disposable income in such instruments when there are numerous other options available?
Before proceeding to dissect this norm, let’s learn some more about the evolution of fixed deposits in India.
Fixed Deposits in India: A Historical Analysis
Traditionally, all banks were required to determine a uniform interest rate on their FDs for tenures ranging anywhere between 15 days and a year. The upper limit for these instruments was 8%.
However, 1985 was a turning point for Indian fixed deposits when this ceiling was removed. In 1992, fixed deposit interest rates underwent deregulation, following which their returns were no longer linked to their maturity. Banks were free to offer interests of up to 13% on any deposit made for longer than 46 days.
Complete deregulation for FDs occurred in 1997, after which bank rates and fixed deposit interest rates were no longer linked. This change was enforced by the Reserve Bank of India.
Today, banks are free to set their own fixed deposit rates and do not require to comply with what other institutions are offering across the same maturity period. However, one thing that has remained constant through all these years is that fixed deposits still offer guaranteed returns on investment.
Indian Economy and Its Role in Investment Choices
The Indian population predominantly comprises individuals belonging to the middle-income group. Such individuals or households have extremely limited disposable income left after meeting their financial liabilities.
The lack of significant disposable income also predisposes investors in the country against undertaking risks. Most people simply do not have the financial backing to recover from huge losses in market-linked investment options.
Therefore, fixed deposits are the ideal choice. Although such investments severely limit one’s wealth-generating potential, they offer maximum capital security.
In fact, credit rating agencies, such as CRISIL and ICRA, score bank fixed deposits on their safety. Such safety ratings can help people determine the safest options, with minimal or no risk of losses.
Additionally, individuals who lack a stable source of income, including retirees, can take advantage of monthly or quarterly interest payouts from fixed deposit accounts, rather than having to wait for maturity.
Fixed Deposit Types
While the Indian market is saturated with a bevvy of FD options, one can divide these into two kinds. The primary difference between the two is related to interest payment frequency.
- Cumulative FDs – In such types of fixed deposits, the interest you earn is reinvested or compounded. You acquire the capital along with the entire interest accrued, through a single payout at maturity.
- Non-cumulative FDs – Investors of such kinds of FDs receive interest payout from the same even before maturity. They can choose the frequency based on their needs. Interest payments can be acquired every month, quarter or year of investment.
Why Should You Consider Fixed Deposit Investments?
Indians are familiar with the fact that fixed deposits are safe investment options, almost as safe as their savings account. Such instruments also offer several other benefits as well –
- Acts as an income plan for retired individuals
If you park your life savings into a non-cumulative FD after retirement, earning a comfortable income from it is simple. This is an especially useful option for people who do not have the privilege of relying on a fat pension.
- Is a relatively liquid form of investment
FD investors can withdraw their capital investment under certain circumstances. Such withdrawals are almost instantaneous, thereby allowing access in case of emergencies. However, premature withdrawal from fixed deposits warrants penalties in most cases.
- Avail loan on fixed deposits
Financial institutions are ready to extend a line of credit to you against your fixed deposit account. Moreover, you can avail such loans without fulfilling any additional eligibility requirements.
The loan-to-value for such credits generally ranges between 85% and 90%. In comparison, mutual funds or equity investments do not offer any such credit facilities.
- Credit card against fixed deposit
You can leverage a fixed deposit account to acquire a secured credit card. Like a loan, such credit cards come with limits of up to 90% of your fixed deposit value. Interest rates on such cards are also lower than traditional credit cards.
Individuals who do not meet the stipulated credit score requirement to opt for unsecured credit card options can avail these alternatives.
Those willing to start an FD must, however, have a sum of at least Rs. 5000 to park into this investment. Further, the returns generated from fixed deposits, while guaranteed, fall short to meet the financial goals of many individuals.
This has forced many new-age investors to seek other forms of investments. Mutual fund investment through SIPs has found favour among this demographic. With such options, individuals can segregate a portion of their monthly income into these funds and enjoy the prospect of higher gains.
Nevertheless, fixed deposits remain a popular wealth-generating option in the country. It also represents one of the simplest ways to initiate your investment portfolio.