Fixed Deposits (FDs) are one of the most preferred instruments for parking excess funds and multiplying your hard-earned savings steadily. Investments in FDs help you earn guaranteed returns and you know exactly how much your money will grow within a period.
But have you ever wondered if you can increase your returns from fixed deposits? Well, there are ways in which your hard-earned deposits can fetch you a higher interest income. Read on to understand how FDs work and how you can maximise your returns.
How do fixed deposits work?
When you open a fixed deposit, you lock away a lump sum amount for a specified period. Here, the principal sum you invested earns interest. Typically, banks allow flexible FD tenures between 7 days to 10 years.
Besides, there are two types of FDs - cumulative and non-cumulative. When your funds earn interest in cumulative deposits, it is added to the sum and is reinvested, resulting in incremental interest growth. When your FD matures, you receive earned interest income and the principal amount invested.
On the other hand, in non-cumulative deposits, the interest is paid out at intervals - monthly, quarterly, or annually.
How to maximise returns on FDs?
Compare offers and opt for a higher rate
Choose a bank that offers competitive interest rates. Nowadays, you can easily compare offers using an FD calculator. All you need to do is input the amount you want to invest and the tenure. The calculator will give you the interest rate and returns you will earn upon maturity.
Furthermore, it is crucial not to get swayed by high interest rates only. You must scout for a credible bank or NBFC. You can check their CRISIL (or Credit Ratings and Information Services of India Limited) and ICRA rating. An FAAA CRISIL rating and MAAA ICRA rating indicate the highest security and credibility, which translates to low chances of defaulting.
Go for a longer tenure
An efficient way of maximising FD returns is investing funds for a long tenure. Since your deposit accrues compounding interest, a higher term translates into more interest income.
Besides, you can couple a long tenure with the cumulative interest payout option to bring in ample returns. When you open a cumulative FD, the periodic interests also earn throughout the tenure. Therefore, you earn significantly higher returns at maturity over periodical payouts.
Diversify and ladder your FDs
You can diversify your investment by depositing your money in different types of FDs. If you have a large sum to set aside, you can spread the funds across schemes with different tenures. Now when your FDs mature, you can reinvest these and create an investment loop. This allows you to spread your eggs across baskets so risk is never concentrated in one scheme. Besides, during a financial crisis, you can easily withdraw a smaller FD rather than liquidating an FD with a higher sum and losing interest income. However, banks often charge a penalty for pre-closure.
While FD investments are one of the safest ways of growing money, it is essential to opt for an offer suiting your financial goals and risk appetite. Moreover, nowadays, you can quickly open an FD online. So, what are you waiting for? Start your FD today and start maximising your returns!