How To Decide The Best Size And Lock-In Period For Your Fixed Deposit (FD)

Fixed deposits (FDs) are savings instruments that offer attractive interest rates for a particular amount of money that is invested for a fixed period of time. FDs are offered by commercial banks, post offices, small finance banks and non-banking financial companies. According to experts, FDs are one of the safest investment options. This investment avenue helps in growing savings, while offering stability and safety of principal amount compared to other investment sources, experts say. One can also avail a host of features and benefits, such as choosing tenor, or the frequency of interest payouts in an FD account.

Where should you invest?

According to experts, the risk of default in post offices and bank FDs is unlikely. However, the returns on post offices and bank FDs is low compared to small finance banks and corporate FDs. "Investors who are risk averse should invest in post office schemes and bank FDs, while the ones ready to take risk can invest in small finance banks and corporate FDs," said Ketan Shah, chief revenue officer, Angel Broking.

What is the best lock-in period for FDs?

An FD of five years or more with a bank or post office offers tax benefit under Section 80C of the Income Tax Act. According to Mr Shah of Angel Broking, FDs are very effective when the investor has a time frame of 2-3 years. "This time frame can be relatively risky if you opt for equity or debt funds. More so, if you are opting for credit opportunity funds then risk is much higher. For such time frames, FDs can be a very sound and low risk option," he said.

How much should be the share of FDs in your portfolio?

According to experts, the share of FDs in the investment portfolio should vary with different age group and financial status. "If an individual is below the age of 30, the risk taking ability is quite higher than other age groups, so he/she can invest less in an FD and more in equity and other investment options," suggests Ritesh Ashar, chief strategy officer, KIFS Trade Capital.

"For the people who fall under the age group of 30-50, have moderate risk taking ability, so, they can invest little higher amount in FDs compared to the previous age group, whereas people who stand in age bracket of more than 50 can opt for large investment in FDs as the risk taking ability is the lowest for such age group."

If you are young or you have limited liabilities, your risk appetite is higher and can afford to be more in equity and less in debt. This can only be decided after a thorough risk profiling," according to Mr Shah.

What should be your pick: Fixed Deposits (FDs) or Recurring Deposits (RDs)?

The difference between fixed and recurring deposits (RDs) is the conceptual difference between lump-sum investing and monthly/systematic investing, respectively. According to Mr Ashar, if a person already has a corpus generated and wants to make bulk investments, fixed deposits is a better option, whereas RDs can act as an option for salaried person, who is looking for investment opportunities.