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How to Choose the Best FD Plan to Maximise Returns

December 21, 2024

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Investing in fixed deposits (FDs) is a popular choice for investors seeking assured returns. However, with so many FD products available, it may seem a bit daunting to select the best FD plan that's aligned to your investment goals. In this comprehensive guide, we will walk you through the factors to consider, provide real-life examples, and offer sample calculations to help you make an informed decision while choosing a fixed deposit product.

Understanding Different Types of FDs

As a starter, it's essential to understand the different types of fixed deposit plans available. Let's explore each option:

1. Standard FDs

Standard FDs are the most common type of fixed deposits, where you deposit a sum of money for a fixed tenure ranging from 7 days to 10 years. These FDs offer higher interest rates than regular savings accounts and may provide options for availing loans and overdraft facilities. In this digital era, you don't need to visit a bank branch to open a standard FD. Instead, you can opt for Digital Fixed Deposits to maximise your savings.

2. Tax-saving FDs

Tax-saving FDs lets you save tax up to ₹1.5 lakh under Section 80C of the Income Tax Act, 1961. These fixed deposit plans come with a mandatory lock-in period of 5 years, meaning you cannot withdraw your FD amount before the lock-in period.

3. Cumulative FDs

In cumulative FDs, the interest is compounded over the chosen interval and paid out at the time of maturity along with the principal amount. These FDs are suitable if you want to maximise your returns over a longer tenure.

4. Non-cumulative FDs

Non-cumulative FDs allow you to select the frequency of interest payouts, making them an excellent choice for senior citizens looking for a regular income stream.

5. Senior Citizen FDs

Senior citizen FDs are similar to regular FDs - just that the interest rate offered is slightly higher compared to regular FDs.

6. Flexi FDs

Flexi FDs combine the features of an FD and a savings account, offering higher interest rates while providing liquidity. These FDs allow you to withdraw funds as needed without breaking the entire deposit.

Factors to Consider Booking an FD

Now that we have understood the different types of FDs, let's dive into the factors you should consider when selecting the best FD plan:

1. Interest Rates

One of the primary considerations when choosing an FD plan is the interest rate offered. Generally, small finance banks offer higher FD rates compared to regular banks. Look for financial institutions that provide competitive rates.

2. Tenure

FD interest rates vary depending on the tenure. Select a tenure that offers maximum returns or is aligned with your investment goals. Use an FD calculator to compare tenure and returns.

3. Premature Withdrawal Penalty

Life is unpredictable, and there could be instances, especially during medical emergencies, where you may have to withdraw funds from your FD before the maturity period. It's important to understand the penalty charges levied for premature withdrawals. Choose an FD plan that offers reasonable penalties, ensuring flexibility and accessibility when needed.

Bonus Tips for Choosing the Best FD Plan

Consider these additional tips to find out the best FD plan:

Perform a comparative analysis of interest rates and tenure offered by different banks before making a decision.
Stick to RBI-regulated entities for security of your principal
Evaluate the ease of the application process. Digital fixed deposits are extremely easy to book and operate

Final Thoughts

Choosing the best FD plan requires careful consideration of various factors such as interest rates, credibility of the institution, maturity amount, and penalty charges. Sign up for an FD that's aligned with your financial aspirations.

Looking to grow your savings? Ujjivan SFB offers a wide range of fixed deposit products. Select the FD of your choice and take a step forward to your financial goals. Alternatively, you can browse through Ujjivan SFB product suite - our wide range of financial products are designed to make your financial life better.

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FAQs

1. What is the minimum deposit amount for an FD?

The minimum deposit amount varies from bank to bank. Typically, it ranges from ₹1,000 to ₹10,000. For premium FDs, the minimum deposit amount could be higher.

2. Can I open an FD jointly with another person?

Yes, most institutions allow you to open an FD account jointly with another person. Having a joint account can be beneficial for shared financial goals or for availing tax benefits.

3. Are FD returns taxable?

Yes, the interest earned on FDs is subject to taxation under the Income Tax Act. The tax liability depends on your income slab.

4. Can I break my FD before maturity?

Yes, you can break your FD before maturity. However, this may incur penalty charges depending on the terms and conditions set by the bank.

5. Is it advisable to invest in long-term FDs?

Investing in long-term FDs can help you plan better for your post-retirement life. However, it's important to evaluate your financial goals and aspirations before you start investing in long-term fixed deposits.

6. What is the interest pay out frequency for non-cumulative FDs?

For non-cumulative FDs, the interest is paid out monthly, quarterly, semi-annually or yearly depending on the product feature.

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How to Choose the Best FD Plan to Maximise Returns