The Buyt Desk
This is a good time to invest in bank fixed deposits. As the Reserve Bank of India hiked the Repo rate and following this the banks started to increase the Fixed deposit (FD) interest rates. In the last one month, many banks have revised their FD interest rates on different tenures. Major Banks including Bank Of Baroda, SBI, Kotak Mahindra Bank, PNB, IndusInd Bank, ICICI Bank, HDFC Bank and many more including some NBFCs have increased their interest rates on FD. If you do not want to take risks and get a guaranteed return then FD is considered a good option. You can further increase your returns from FD by following a few things while starting FD. Below are a few tips and tricks to smartly invest in Fixed Deposits to get maximum returns.
Go for short-term fixed deposits
Whenever there is a change in Repo rates, short and medium-term FD interest rates are the first to get affected when compared to long-term FD interest rates. So when you invest in a short or medium-term maturity FD you will enjoy higher interest rates as these are the first to increase interest rates when it starts to rise. To increase your returns and to get maximum benefits from FD, invest in Short to medium-term fixed deposits.
Utilize floating rate options
Floating FDs is another way to increase your ROI on FDs. These will allow investors to avoid locking money for a long period with less FD rates. Floating FD interest rates are directly linked to the repo rate which means the interest rates change as the repo rate changes. Under this FD scheme, investors can invest in FDs without stressing about the Repo rate increase. As repo rates increase, the FD interest rate also increases. As there is a hike in repo rates, the investors in floating FD will be benefited as they will get higher returns without doing anything.
The fixed deposits ladder approach
Fixed deposit laddering is a way to get a guaranteed good return on FD investment. Its concept is the distribution of funds into different FDs of different tenure. By dividing a lump sum into various FDs of different maturity, you will be creating an FD ladder plan. This means, that one or the other FD matures every year.
Instead of having one large FD, split it into many smaller FDs with tenure such that one matures every year. For example – you can split your Rs 5 lakh FD into 5 FDs of Rs 1 lakh each, with tenure of 1 year, 2 years, 3 years, 4 years, and 5 years each. After a year, one FD matures. Now extend the term of this FD to 5 more years. And after 2 years another FD of 2-year tenure matures. Now extend the term of this FD to 5 more years. Doing so, you will have 5 FDs maturing every year for the next 5 years. This is how you will be creating FD ladder by performing this exercise every year. Using the FD ladder strategy, you can save yourself from your lump sum investment being locked in at the lowest interest rate for the long term. This way FD ladder will maximize your returns.
Avoid making long-term fixed deposits
When your FD investment term ends and you want to reinvest in FD, renew it to shorter-term deposits. Even when you want to make fresh investments choose shorter-term deposits. This is done to take advantage of interest rate hikes. Also locking in your money for a long time in long-term fixed deposits is not ideal.
Avoid prematurely withdrawing from FD
Premature withdrawals will stop the magic of compounding. And this will hamper your way of wealth creation to reach your financial goal. A premature penalty may be charged. To maximize return, do not withdraw the FD before maturity.
Choose an investment plan and tenure smartly
Select the tenure based on your financial goal. Always go for FDs which are cumulative unless you are in need of money. If you are not in need of money, you can reinvest the interest earned back in the FD else you can take the payout for your expenses. Taking payout will not compound your investment and it doesn’t grow. For higher returns, opt for cumulative FD.
