How and Why to Invest in Fixed Deposits in 2023

Debt is a good investment asset for investors in 2023 with central banks hiking interests at a record level in 2022. Indian investors can easily get 7.5-8% in most large banks in India for a duration of 2-3 years. Here we explain FDs as a debt asset.

A fixed deposit (FD) is a type of financial deposit where the interest rate is fixed for the entire term of the deposit. The whole deposit amount and interest earned are repayable at the end of the tenure. FDs are one of the safest investment options and offer assured returns. FDs can be opened with banks, NBFCs, and even post offices. Note there are corporate FDs also, but they are much riskier and should not be part of the normal portfolio of a retail investor as they involve complexities in terms of credit risk, etc. You should generally have FDs in large banks which are too big to fail. You can also invest up to INR 5 lakhs in small finance banks to earn higher interest rates as large banks like SBI and HDFC give lower rates. Also, read Best Ways to save Tax on Investment Income in India

The interest earned on an FD is taxable as per the income tax slab of the investor. FDs come with a tenure ranging from 7 days to 10 years. Note FDs are one of the worst taxed products as there are no indexation benefits like those given to debt MFs or no offsetting taxes like that for real estate etc. For people in higher tax slabs, FDs are not very good as debt assets. They should look more at debt MFs.

Types of Fixed Deposits

First of all, what are the different types of FDs, and which are important for you?

Different banks offer different types of FDs, depending on the need of the customer. The most common types of FDs are:

Regular Fixed Deposit: This is the most basic type of FD account where the principal amount and the interest are paid at the end of the maturity period.

Cumulative Fixed Deposit: In this type of FD account, the interest is compounded at periodic intervals and is paid along with the principal amount at the maturity of the deposit.

Tax-Saving Fixed Deposit: As the name suggests, this type of FD account helps you save taxes. Individuals with an annual income of up to Rs. 1.5 lakhs can avail of a tax deduction of up to Rs. 1.5 lakhs under Section 80C of the Income Tax Act.

Recurring Deposit: In an RD account, you must deposit a fixed sum of money periodically. The tenure of an RD account is generally 5 years.

Senior Citizen FD: Senior citizens usually get a 0.5% higher interest rate on their FDs as compared to regular FD account holders.

What are the advantages of Fixed Deposits:

The interest rates on FDs are higher than that of savings accounts. The returns on FD are guaranteed. The deposit amount is safe as FDs are insured by the RBI up to Rs. 5 lakhs. FDs offer higher interest rates to senior citizens. Fixed deposits have a fixed tenure which helps you in financial planning. You can avail of a loan against your FD.

They are easy to buy and sell. Everything can be done online with 2-3 clicks. It is very simple and easy to understand even for not-so-digital-savvy folks. However, note that if you sell the FDs prematurely then you must pay a penalty in the form of a lower interest rate so be wise when you choose the duration and the size of the FDs.

Disadvantage – The biggest disadvantage is the taxation part which I have already explained. Also, you should be careful in how you build your FDs. They should be laddered in the form of different tenures and should be in smaller chunks.

Laddering of Fixed Deposits

Let’s say you have 10 lakhs to invest in FDs. Then you should invest let’s say Rs.2 lakhs in 1 year, Rs.2 lakhs in 2 years, and so on. This will also depend on the interest rate for eg. If the interest rate on 2 years is much higher than 3 years, then put a larger allocation in 2 years. Also, you should break up the Rs.2 lakhs into Rs.50,000 chunks. This should be done in case you need let’s say Rs.40,000 in an emergency. Then you only have to break up on 50,000 FD and incur the penalty on Rs.50,000 instead of Rs.2 lakhs.

Ok after all the Gyan, if I had to invest let’s say Rs.10 lakhs in FDs where and how to invest it?

I would go to Ujjivan Small Finance Bank. This Bank is one of the better-run SFBs in India and is currently offering 8% for 80 weeks for normal citizens and a whopping 8.75% for senior citizens. Given that RBI is insuring you for Rs.5 lakhs, you can invest in the names of at least two seniors in your family with Rs.5 lakhs each in chunks of Rs.1 lakh. Since the process of KYC etc. is done digitally this involves minimum hassle and gives you very high returns (higher than PPF, senior citizen savings scheme, etc.).

You could also invest in 990 days for 8.5% which is also not bad considering you get almost 2.5 years of duration instead of 1.5 years in the earlier case.