Why you Must Consider Fixed Deposit Interest Rate

Why you Must Consider Fixed Deposit Interest Rate

From Arjun Singh

Looking to grow your savings but don't want to deal with risky investments? Fixed deposits could be a great option for you!

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Looking to grow your savings but don't want to deal with risky investments? Fixed deposits could be a great option for you! As an extremely popular investment avenue in India, fixed deposits offer stable and guaranteed returns over a predefined tenure. Unlike stocks or mutual funds, your capital remains safe too. In today's low interest rate regime, finding a fixed deposit with an interest rate higher than your savings account is key to fighting inflation and making your money work hard. 

Even an incrementally better interest rate on a fixed deposit can add up and help you inch closer to your financial goals. In this article, we'll discuss the reasons to consider fixed deposit interest rate.

FDs Offer Stability Amidst Uncertainty

We live in complex times with frequent interlinked economic and geo-political variables impacting financial markets. While equities might provide higher returns over 7-10 years, the journey is often volatile and demands nerves of steel. FDs provide ballast – steady and assured returns acting as an anchor stabilizing overall portfolio returns. So even if some speculative investments fare poorly during downturns, your FD interest payouts continue uninterruptedly, providing stability to your finances.

Earn Steady Passive Income

FDs can generate a secondary income stream through steady interest payouts, either monthly, quarterly, half-yearly or annually as per your liquidity needs. Assuming you do not require regular income, opting for a cumulative FD that reinvests the interest until maturity is recommended for maximum compounding benefits. For instance, leading banks offer over 6% interest on 3-5 year cumulative FDs currently.

Buffer Against Interest Rate Changes

When interest rates seem to be on an uptrend, banks hike FD rates to mobilize longer-duration deposits. Locking funds right away allows capitalizing on the higher rates instead of trying to time the peak rate. Even existing depositors can break prematurely and reinvest at the new peak rates. Riding the yield curve through timely reinvestment allows maintaining returns at no extra risk.

Enjoy Higher Returns than Savings Accounts

While savings accounts provide complete liquidity, their interest rates are far lower in the current 2-3% range. Locking funds in an FD earns you a significantly higher return for committing to keep the money untouched for a few years. The differential in returns versus savings accounts is the implicit cost for retaining liquidity. Evaluate whether you require frequent access to these funds before deciding the ideal allocation between FDs and savings accounts.

Customize Cash Flows to Liquidity Needs

FDs allow aligning interest payouts to budgeted household expenses through monthly, quarterly, or annual payout options. Arrange laddered FDs maturing each quarter to receive regular interest income. Or accumulate annual interest to reinvest into fresh FDs for compounding at higher ticket sizes yearly. Legacy investors drawing regular pension substitutes can reinvest maturity proceeds from older FDs into new ones, perpetuating the income flow.

Conclusion

FDs optimize your post-tax yields at higher tax brackets due to 80C deductions up to Rs 1.5 lakhs per year. Do the math - if you fall in the 30% tax slab, an FD rate of 6.7% translates to around 9.6% effective return post-tax savings. That's a yield unmatchable by any other comparable fixed-income option. No wonder FDs remain an evergreen tax-saving instrument for supplementing equity gains in your portfolio. 

Bloggers can help readers understand all facets of evaluating fixed income choices in this continuing uncertainty over interest rate moves. Assured returns always aid in reducing overall portfolio risk.

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