Bank fixed deposits (FDs), according to a financial planner, fall under the comfort investing category, as most individuals invest in this instrument and often, randomly. This only increases in the present interest rate regime, where the annual rates are between nine and 10 per cent. Some banks (Bank of Baroda, Bank of India and Corporation Bank) have been raising it even now, though on shorter tenure deposits — one year and less. Largely, there are two common tenures — one year or five years — depending on the requirement to save tax.
But that’s not how it should be viewed always, planners say. The thumb rule is that in the high rate environment, you should tap the longest deposit tenure to make the most of it and vice versa. But, your risk and age profile also need to be looked at. Here’s how:
Youngsters (20-30/35 years): It is highly likely that those in this age group do not have any liabilities. Hence a longer tenure deposit — three years and more — is suggested. But, mostly when you are just starting to work, you are unclear about future goals, which evolve over time, points out Anil Rego of Right Horizons. “So, we mostly advise this age group to start with one- to two-year deposits. Because they do not have built-up capital and, hence, deposits help in case of a sudden need for a lumpsum amount,” he explains.
Also, most youngsters take to deposits because they are not well acquainted with stock markets and opt for deposits to create wealth. “Then there are cases where the individual has a liability like an education or home loan,” says Vivek Rege of V R Wealth Advisors. “If the loan charges a higher interest than he earns on deposits, he is better off prepaying. Deposits help in accumulating the amount to prepay.”
Middle age (35-50 years): The good thing about this age group is that you are likely to have a decent cushion of built-up capital. Hence, you could park your funds in bank deposits for two to three years for near-term necessities.
Rege says these days many parents do not get covered under their children’s employer-provided health insurance cover. Neither do they have a separate cover. In such cases, shorter-term fixed deposits, that is, of one year or less, can help in case of a medical emergency.
Here, you also need to keep your tax implications in place. Investment experts say most start planning for their future goals from the thirties. Hence, a larger number of individuals in this age bracket are likely to have invested in either mutual funds or through endowment/unit-linked plans for their retirement or their child's future as high growth avenues are recommended. As a result, fixed deposits, typically, are out of the list. Importantly, most of the equity or long-term instruments are exempt from tax.
Near retirement/retired: If you fall in this category, you should go for the longer-tenure deposit route — that is, three years or more. For, this will ensure that you have a sustained quarterly/yearly income and give tax benefits. This is also a safe way to preserve the post-retirement corpus.
Long-tenure FDs also help you absorb interest-rate movement shocks, if any. This is especially true in the present conditions, where rates are likely to start moving down anytime soon, and interest income for those in this bracket will remain untouched.
Rego advises flexi deposit schemes for those not clear about near-term financial needs and yet do not want to keep their money idle in the bank. With State Bank of India’s scheme, you need to invest between Rs 5,000 to Rs 50,000 a year for a minimum of five years and a maximum of seven years. The rate of interest will be the same as in case of term deposit, or 9.25 per cent in this case.