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> A fixed deposit (FD), also known as term deposit, gives a fixed rate of interest until maturity.
> While conventional investors consider it as one of the best investment options because of its risk-free nature, the falling rates in the current scenario have become a point of concern for them.
A fixed deposit (FD), also known as term deposit, gives a fixed rate of interest until maturity. While conventional investors consider it as one of the best investment options because of its risk-free nature, the falling rates in the current scenario have become a point of concern for them.
A majority of lenders have recently reduced their FD rates in tandem with the RBI’s decision to cut the repo rate on multiple occasions.
Considering that, investors may have doubts as to whether they should still invest in FDs.
Experts say that investing in FDs should still be continued seeing its risk-free nature.
The need to have emergency funds has come to the forefront in recent times. Thus, experts say, it is advisable to set aside an amount that could be sufficient to survive for at least three to six months in case of emergency.
“Investment options that offer ample safety and liquidity should only be chosen as an emergency fund,” experts say. FD, being a secure investment, can hence be used as an emergency fund investment.
In any unforeseen requirement, fixed deposits can easily be converted to ready cash.
However, there?s one disadvantage here too, says Prashant Joshi, Co-founder and Partner at Fintrust Advisors.
?The premature withdrawal of the FD not only attracts a penalty but also the promised return on the FD comes down, which is a double whammy,? he warns. This penalty in some instances can be up to 0.5 percent of the invested funds and therefore could lead to significant financial loss.
To avoid such circumstances, investors should, nevertheless, go for ?FD laddering?.
?Using this technique, one can split the available/surplus funds based on their usability. If the amount is big, it can be broken into small and multiple fixed deposits, which can eliminate the big amount pre-closure charges and reduce hassle,? explains Kapil Rana, Founder and Chairman, HostBooks Limited.
In the case of financial exigency, only FDs amounting to the requirement can be taken out and not the entire investment value.
Rahul Agarwal, Director – Wealth Discovery/EZ Wealth, explains this with an example.
?If an individual has to invest a lump sum of Rs 10 lakh in a 5 years’ FD, he can divide it into smaller parts with the laddering technique. This can even be of Rs 2 lakh each across maturities ranging from 1 to 5 years. He can choose to invest smaller investments in shorter duration FDs and incrementally increase the quantum of investment into longer tenure FD?s,” Agarwal explains.
With this, investors will have FD maturing each year which would provide the liquidity buffer. In case of emergency, he can liquidate the smallest tenure FD, thus, minimising the amount lost in the form of penalties.
?FD laddering averages out the interest rates earned over the long term and also provides the flexibility of reinvesting into higher interest rate FDs if the interest rates go up,” adds Agarwal.
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