The pandemic brought about job losses, salary cuts and slowed economic progress worldwide. So, more people started opting for less volatile investment options like fixed deposits (FDs). Perhaps, you’ve considered opening one for the very same reason.
But here’s the thing. You need to consider a lot more than market volatility and returns when investing in an FD during pandemic times. Read on to discover the five important factors you should consider before opening an FD.
Five Important Factors to Consider Before Investing in a Fixed Deposit
1. Tenure
Never lock in all your funds for a long period, especially during a pandemic. Why? Because this is the quickest way to go into a financial fix if you exhaust your funds.
Decide the tenure carefully after considering your financial obligations. Doing this helps you recover your funds at the end of the tenure instead of closing the FD prematurely. And this saves you the penalty charges applicable.
2. Cumulative and Non-cumulative FDs
Banks offer cumulative FDs wherein the interest gets compounded at the end of the FD tenure, and non-cumulative FDs offer regular interest payouts. So, which one do you choose?
If you have other financial sources to sustain you for the FD tenure, choose a cumulative FD. Since the interest earned is reinvested into the FD, you get greater returns through compounding.
However, if you need liquid funds periodically, go for a non-cumulative FD. Here the interest payouts are deposited periodically to your bank account.
3. Tax Deducted at Source (TDS)
The interest earned from your FDs is taxable in India.
Banks deduct 20% TDS on interest on FD if you do not submit your PAN number. But if you submit your PAN details, the TDS gets reduced to 10%. So remember to submit your PAN details to your bank.
Don’t fall under the taxable bracket? Submit Form 15G/H to prevent the deduction of TDS on interest.
4. Frequency of Interest Payout
Check the bank’s policy regarding the withdrawal of interest if you expect to earn a regular income from the fixed deposit’s interest. Earlier, banks offered quarterly and annual interest withdrawals. Now, banks also pay out monthly interest as part of non-cumulative FDs. Therefore, you must consider the bank’s policy on the interest payout if you want a steady income from the interest earned on a fixed deposit.
5. Premature Withdrawal Clause
If you prematurely withdraw your funds, you must pay the penalty. Most banks impose penalties by reducing the relevant interest rate by 0.5% to 1%. And depending on the investment amount, this can be a significant amount of funds.
So, check the withdrawal clause of your banking partner carefully before opening a fixed deposit. This ensures that there are no unexpected surprises when you withdraw funds prematurely during an emergency.
Wrapping Up
Follow the above tips if you are investing in a fixed deposit during the pandemic. This way, you can be assured you select the right scheme based on your financial goals while still getting high returns.
Additionally, be sure to plan your investment strategy before investing. This will help you choose the right FD scheme as well as the banking partner.
