How to Select Fixed Deposit That Aligns with Your Investment Goals

As an investor, it's essential to have an investment instrument in your portfolio that helps in mitigating risks pertaining to market volatility. Fixed Deposits offer that and more. Not only you get stable and secure returns, with smart investments, you can also earn higher returns, save tax, and more. 

In this blog post, we have decoded how to choose the right FD that aligns with your investment goals. 

Factors to Consider to Choose the Right Fixed Deposit

1. Understand Your Investment Goals 

Before you start comparing fixed deposit options, take a step back and assess your investment goals. Are you saving for a short-term expense like a vacation or a long-term milestone like retirement? Your investment planning horizon will largely dictate the ideal FD tenure for you. Here's a quick guide: 

• Short-Term Goals (less than 1 year): Choose high-interest FDs with tenures of 6-12 months 
• Medium-Term Goals (1-5 years): Opt for FDs with tenures ranging from 1-5 years 
• Long-Term Goals (more than 5 years): Consider longer tenures of 5 years and above 

Point to note: FD interest rates are calculated via compound interest method. You earn interest not only on the principal amount but also on the accumulated interest, leading to higher returns. So, if you're looking to maximise your returns, opt for long-term Fixed Deposits. That said, if your goal is to buy a car within 1.5 years, you can open short-term FDs for quick gains.

2. Compare Interest Rates

The interest rate is the primary determinant of your FD returns. Even a slight difference in rates can significantly impact your earnings over the long run. Let's look at an example: 

Suppose you invest ₹5 lakh in a fixed deposit. Here's how different interest rates affect your returns over a 5-year tenure: 

As you can see, a 1% difference in the interest rate leads to a nearly ₹40,000 difference in the maturity amount. So, always compare FD rates across banks before locking in your funds. 

Disclaimer: The above example is for illustration purposes only. You can check Ujjivan's FD interest rates here. 

3. Factor in the Compounding Frequency

The compounding frequency is another critical aspect that impacts your FD earnings. Most fixed deposits offer the following compounding options: 

• Quarterly Compounding 
• Half-Yearly Compounding 
• Annual Compounding 

Rule of thumb: The higher the compounding frequency, the greater your returns. 

Let's understand this better with an example. Say you invest ₹1 lakh in an FD with a 6.5% interest rate for 3 years. Here's how different compounding frequencies affect your returns: 

While the difference might seem minor, it can add up substantially for larger investment amounts and longer tenures.

4. Assess Your Liquidity Needs

Liquidity refers to how quickly and easily you can access your funds when needed. Cumulative Fixed deposits are relatively liquid. However, most banks allow premature withdrawals, albeit with a penalty. 

If you have upcoming liquidity needs, choose shorter FD tenures that match your requirement timelines. Alternatively, you can ladder your FDs by splitting your investment into multiple FDs of varying maturities. This strategy offers the dual benefits of higher returns through longer tenures and liquidity through shorter ones.

5. Look for Value-added Features

Many banks offer value-added features with their fixed deposits to sweeten the deal. Some of these FD selection tips include: 

Flexible Tenures: Some FDs come with the option to choose your own tenure, say 7 months or 19 months, instead of the standard 6 or 12 months.

Auto-Renewal Facility: This feature automatically renews your FD on maturity, saving you the hassle of manual renewal.