Fixed deposits (FDs) continue to remain a popular investment option in India. Amid broader market volatility, many investors look at products such as FDs to ensure stability in their portfolio.
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Offered by banks and financial institutions, it provides guaranteed and stable returns. FD rates can vary by banks and also depend on aspects such as tenure of deposits. Most banks reward investors who want to stay committed for a long time. At the same time, they also offer flexibility to those who just want to park their money for a shorter duration, while continuing to grow modestly.
While investors may think that a small difference in interest rates offered by banks does not matter, it can have a significant impact on investment outcomes due to compounding power. Even a difference of 1.5% in FD rates can lead to substantially higher earnings, especially for investors with larger deposits.
Let us see how the math supports this:
Assuming that an investor has Rs 1 crore in FD. The investor approaches a bank ‘A' offering 6% returns v another bank ‘B' offering 7.5% returns over three years. Here's how much the difference can be:
Returns from Bank A:
Investment: Rs 1 crore
Returns: 6% p.a.
Time: 3 years
Estimated returns: Rs 20 lakh
Total value of fund after 3 years: Rs 1.20 crore
Returns from Bank B:
Investment: Rs 1 crore
Returns: 7.5% p.a.
Time: 3 years
Estimated returns: Rs 25 lakh
Total fund: Rs 1.25 crore
A comparison shows that between the two banks, 1.5% return rate can create a difference of around Rs 5 lakh, which translates to more than Rs 1.5 lakh additional income per year.
If investors wish to park their money for longer periods, they can compare the FD rates of various banks to ensure maximum returns. However, most banks tend to offer the highest rates around three-year tenure for deposits under Rs 3 crore. For five years or more, the rates can be less attractive. Overall, selecting the tenure and deposit value ultimately depends on the financial goal of the investor.
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Higher FD interest rates can improve returns but investors should also factor aspects such as the bank's credibility, inflation and taxes to ensure that the outcome matches their expectations.
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