Fixed deposit best option for risk-averse investors

Harshil Mehta

Features like preservation of capital and surety of returns have ensured that fixed deposits (FDs) are a favourite investment option for masses. This trend is, however, changing with the growing preference of investors towards equity shares and mutual funds.

Despite this shift in investor preference, fixed deposits continue to remain one of the most prominent investment avenues for consumers, primarily due to the surety of returns it offers. Acceptability of FDs as collateral for loans up to 90% of the FD amount and the option of flexible maturity has also renewed interest for investors in this investment product.

Interest rates

It is a common saying that one’s financial health is reflected by the diversity of investments and therefore it is imperative to diversify the fixed deposit portfolio to meet different long-term and short-term financial goals.

A fixed deposit as an investment option depends on the rate of interest; it is advisable to split the amount available for investment in FDs into smaller amounts, each at different tenures. This will help in safeguarding the investment from interest rate fluctuations by providing the investor with an option to reinvest the deposit on maturity besides ensuring a regular stream of income for the investor.

To earn better rates, one should look at FDs where the interest is compounded at shorter intervals like every quarter under the compound interest method. This is besides considering fixed deposits by companies, NBFCs and housing finance companies. FDs issued by non-banks should only be considered after careful consideration of their nature of business, their stability of business, their service network and most importantly their credit rating. Although credit ratings have no impact on the interest rate offered by these company on FDs in any way, but it is a way for investors and depositors to check the credibility of a particular entity before making an investment.

FDs with additional benefits

Corporates, in order to win the trust of their customers, come up with innovative fixed deposit schemes to cater to the various class of investors. These fixed deposits provide attractive interest rates and are backed by robust processes and technology that delights the customer. Many such products come with features which enable instant liquidity in case of health emergency besides offering the best interest rates.

Corporates are also coming up with varied and customised deposit options for different customer types like individuals, companies, societies, clubs and trusts with tenures ranging from 12 to 120 months. This is besides specialised fixed deposit products for women investors and free accidental death insurance for individual investors. Credit ratings of such fixed deposit products are often high and these products offer a certain amount of flexibility. Some corporates also provide an ATM-cum-debit card on fixed deposit investments with some limits but no extra cost.

Taxation

Interest income on fixed deposits is taxable under the head ‘Income from Other Sources’ and investors need to pay tax depending on the tax slab under which they fall. Interest income from FDs up to Rs 10,000 is exempt from tax and TDS on the income above this limit is directly deducted by the bank at 10% if the PAN details are available and at 20% if PAN details are not available.

FD holders who do not have a taxable income bracket can submit a declaration form 15G to avoid TDS. This can also be done by individuals below 60 years, HUFs and trusts etc. Similarly, senior citizens can fill Form 15H to avail exemptions on interest earned.

This will help them avoid the exercise of claiming refund while filing returns.

Investors looking to save tax on interest earned from fixed deposits have the option of investing in fixed deposits approved under Section 80(C). Select banks offer this deposit, and an investor can place a deposit up to 1 lakh for a period of 5 years. Such an investment is eligible for deduction from taxable income under Section 80 C.

Conclusion

Fixed deposits are an attractive investment option for customers looking at stable and assured returns. This is also a very good option for ensuring that you get a fixed regular income every month. In the Indian financial system, there are limited product options which give you a fixed return, and fixed deposits are one of them. For risk-averse customers, these are undoubtedly one of the best investment options available today.

The author is CEO, DHFL. 

The views expressed in this article are his own