When contemplating alternatives for investment, FDs gain the topmost spot in an investor’s evaluation. Particularly in a country like India, where safety of finance is a priority, investments in fixed deposits automatically are the most favourable.
The main reason behind this lies in the fact that interest rates on a FD show the least fluctuations with respect to market ups and downs. In consequence, where investors seek an optimum return, this stability in income is a massive plus.
Safety of initial investment amount is yet another factor that works in favour of investment in a fixed deposit, apart from stable FD interest rates. Apart from that, fixed deposits are ideal for striking a balance between liquidity and savings.
An ideal investment portfolio must be inclusive of safe, moderate and risky investments in optimum proportions. The proportion herein, of different investments differ according to the respective risk appetites of the investor. However, in any case, due to the risk-return profile of fixed deposits, they can act as effective diversification alternatives in the portfolio of an investor.
How do fixed deposit investments help an investor? The following points illustrate how.
Assurance of returns
As mentioned earlier, FD interest rates are least dependent on market fluctuations. Hence, investors need not worry about losing their returns on investment owing to wayward market tendencies.
This is a great positive for investors who are averse to risk. Since such investors prefer stable returns over a short period of time, investment in fixed deposits comprise of a large share of their portfolio.
Tenure of investment
A portfolio must also comprise of investments of varying tenures. This is because varying tenures provide varying rates of returns on investments. Fixed deposits must be preferably kept for medium to long tenures, for optimization of the returns earned from a portfolio. For example, a fixed deposit, gives a return of 8.40% when invested for 12 months. When invested for a period of 15 months, the FD interest rates go up by 0.10%.
Hence keeping optimal tenures for investment in fixed deposits is essential for an investor. To get an estimate of the best tenure for investment, one could always calculate the returns for various amounts and time periods on FD calculators available online.
Not just that, one could very well opt for diversifying returns while investing in fixed deposits as well. All one needs to do is, choose the right amount to be invested in cumulative and non-cumulative fixed deposits. While the former would give a lump sum after a certain period of maturity, the latter gives periodic returns on investments.
Again, FD calculators come in handy while an investor contemplates the division of the funds allocated for investment in fixed deposits.
Liquidity of investment
For another, investments must be of varying liquidities in a particular portfolio. One must always provide for any financial contingencies that might arise in future. Hence, while investing, the investor must ensure that a certain amount must be available to him when he needs it the most.
Since fixed deposits are meant for ensuring liquidity of investments, hence, the thought of breaking them to mitigate financial contingencies might strike the investor immediately. This is exactly why fixed deposits can be broken as desired, so that the funds are accessible to the investor during emergencies. Nevertheless, the investor has to forego a small percentage of the FD interest rates.
This is yet another advantage of including fixed deposits in a portfolio. Fixed deposits act as major tax saver vehicles. Fixed deposits held upto a maximum of Rs. 100000 for 5 years qualify for tax deductions under Section 80C of the Income Tax Act.
Therefore, fixed deposits are a combination of tax savings and optimum returns.
Companies offer fixed deposits. The FD interest rates from herein are higher than those offered by banks. With 200+ branches spread across the country, the deposits are supremely accessible. Since, facilities of FD booking, redemption and liquidity are available online, managing them are convenient like never before. Also, an investor is provided with adequate security of investment due to credit ratings of MAAA and FAAA from ICRA and CRISIL. Both these ratings mark an investment in this company safe.
Thus diversifying one’s portfolio with the aid of fixed deposit (FD) is always a wise investment option.