The return on fixed deposit (FD) investment is a function of interest rate and the lock-in period. Investors need to understand these aspects to maximise their returns thoroughly. This article aims to guide investors in selecting a good rate of interest for fixed deposit investments.
Selecting the Interest Rate
The interest rate for any fixed deposit investment is fixed at the beginning of the tenure and cannot be changed during the term. However, investors can select the best interest rate before entering into a fixed deposit investment. The interest rate on any fixed deposit varies depending upon the lock-in tenure. The banks or NBFCs disclose the different lock-in tenures and the interest rates associated with each tenure on their websites or brochures. Investors should review the lock-in period and the returns associated with each term to decide on a fixed deposit that best suits their requirements. The interest rate can increase or decrease even with a slight change of one day in the lock-in tenure. Hence, this aspect calls for a thorough review of the rate of interest and whether your current financial positioning allows for a specific lock-in period.
For example, the interest rate offered on a fixed deposit for a lock-in period of 3 to 6 months is 4%, and the interest rate offered for a lock-in period of 6 months and 1 day to 9 months is 5%. An investor, in this case, can earn an additional 1% return by extending the lock-in period. Let us put some numbers around it to understand the benefits clearly.
- FD investment of Rs.10,00,000 for 6 months at the rate of 4% per annum would generate a return of Rs. 20,000. (10,00,000 x 1.04^0.5)
- Whereas, an FD investment for 9 months at the rate of 5% per annum would generate a return of Rs. 37,270. (10,00,000 x 1.05^0.75)
Thus, the investors can generate an additional return of Rs.17,270 by extending the lock-in period by three months. The above calculations can be carried out easily using a calculator of fixed deposit available online. It provides the users with an option to determine exact returns associated with different lock-in periods. Using an online calculator of fixed deposit also helps the user select the best interest rate and lock-in period for their investment.
Selecting the best rate of interest for fixed deposit is the first step in maximising returns. The investors should also be wary of utilising the lock-in tenure to their benefit. Choosing a cumulative FD that allows for reinvesting the interest earned can be a better option than selecting a non-cumulative FD with a monthly or quarterly interest payout. A cumulative FD maximises returns by reinvesting the principal amount and the interest earned. Investors should also ensure that the fixed deposit is not broken prematurely and runs its entire tenure. Breaking an FD before maturity incurs a penalty fee which may reduce the overall returns. Reading the terms and conditions binding the FD can also prevent losses on returns.