Feb 4, 2010

How to Invest in Bank Fixed Deposits (FDs): Practical Tips (#1)

Photo by Refracted Moments

Bank fixed deposits (FDs) are favorite choice for parking your funds due to safety of capital and assured / guaranteed returns. Other reasons for their popularity are familiarity and dependability.

No doubt, bank FDs are best for parking your short-term temporary cash. For long term investment one has to take a call based on the interest rate scenario. But solely relying on FDs is not a prudent choice due to plethora of other debt / fixed income instruments available for investment.

However, if you’re already investing in fixed deposits (FDs) of banks or would like to invest in future you should at least be aware of certain tips and tricks to make the most of your money invested in fixed deposits.

Fixed Deposits (FDs) of banks are no more a passive investment instrument which didn’t require a much thought. There is a lot of scope
for planning while investing in them.

How to Invest in Fixed Deposits: Practical Tips
Here’s a list of a few tips to know while investing in bank fixed deposits:

1.Have an on-line bank account
Know that in this era of online banking, you’re no more required to walk into a branch to open a FD. With the net banking facility offered by banks, investing in FDs is quick, simple and hassle free. You can do it sitting at your home or office.

Once you sign-up for net-banking, operating your bank accounts including investing in FDs becomes quite easy and convenient.

2.Have multiple Bank Accounts
Second, it is very important that you should have bank accounts in at least 2-3 different banks due to following reasons:

i). To avoid TDS
It can help you avoid TDS provisions. TDS @ 10% is applicable on bank FDs if the total interest earned during the year exceeds Rs 10,000 per bank branch.

ii). To take advantage of differential interest rates among banks
Usually, there is some variation in FD rates across different banks. But sometimes the interest rates can vary a great deal between different banks for deposits of similar tenure.

iii). To increase the insurance coverage of your bank deposits
Suppose you’re having around Rs 6 lakh in a single bank held across various accounts such as saving deposits, fixed deposits or recurring deposits. Now, instead of relying on just one bank, if you spread your deposits across say, 3 banks, your insurance coverage will also triple (i.e., increase from Rs 1 lakh to Rs 3 lakh).

No doubt having multiple banks is a very good idea; however, please don’t go overboard and open too many accounts. Have at the most 3 accounts because the more the number of accounts, more the complexity and it can become a hassle to operate and manage them in the long term.

3. Don’t let your money idle away in saving / current accounts
Minimum tenure of bank FDs is usually 7 days. Although, usually rate of interest offered on deposits for 7-14 days and 15-29 days is less than 3.5% which is offered on savings bank account, still it makes sense to transfer the excess funds to FDs rather than letting them lying down idle in saving or current account. Why?

Let’s say you receive a credit of Rs 2 lakh in your saving account on, say, 5th of the month, but you’re going to require the funds before the end of the month (assuming there are no more credits in your account during the month). So, although the amount gets deposited in your savings account before the 10th but since it won’t be there in your account till the last date of month, you won’t receive any interest on it. So the better alternative is to transfer the funds to a fixed deposit account. Suppose, you require the funds on, say, 26th of the month, here you can open a FD for 20/21 days. Let’s further assume that your bank offers you an interest rate of 3% on this FD. So, earning an extra amount of Rs 329 in a month on Rs 2 lakh is not a bad idea, if you’ve to spend just 2 minutes for it. And depending upon the idle money lying in your savings account, this can be even greater.

In case you’re getting higher rates on short term FDs—minimum tenure is 7 days—as compared to savings a/c, you should invest in them instead of letting the funds lying idle in savings a/c.Similarly, money idling in your current account should be invested in short term deposits because there is no interest on the balance lying in a current account.

However, you won’t be required to do this financial jugglery for saving accounts from next financial year (i.e., w.e.f. 1st April, 2010) as per RBI circular issued in April 2009.

4. Consider Recurring FDs
If you’re a regular investor in FDs, you should also contemplate investing in bank recurring deposits because they offer many advantages over regular FDs: investment in smaller denomination, no TDS, and disciplined investing. Recurring deposits of banks are like Systematic Investment Plan (SIP) of mutual funds.

For other tips about investing in bank fixed deposits, wait for part-2.

Also see:

1. Interesting Interest Information about Bank FDs
2. Taxation of Interest on Bank FDs
3. Bank FDs of a Deceased Person

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