Fix your Savings!

Bank Fixed Deposits (FDs) are a very safeway to jumpstart your savings. If you have a savings account (I am sure we all do) then this is an article that will help you yield better returns. It is often advisable to park your savings funds into a fixed deposit for the simple reason that if the money is lying idle for 2 mths or more then you will get higher returns than you would in a normal savings account i.e. 4%. Adding benefits are that this is a safe investment and has many features to choose from. As we are aware that India’s banking sector consists of both commercial and co-operative banks. It is observed that usually private banks offer a lesser interest rate on a term deposit. However, this does not necessarily hold true in all cases as the duration, penalty charges etc also play a vital role.

So how should one choose a bank for fixing a deposit or exactly what points should be considered and are hidden by banks? A few tips towards choosing the right bank for just the right amount of maturity amount are highlighted below.

  • Duration

When you want to move your savings from a lower interest rate to a higher one then duration plays a major role. Ideally no money should be fixed for less than two months because the interest rateswill usually be lesser than the normal savings rate i.e. 4%. Therefore if someone wants to make an FD,

then they go for a higher duration. Also if an FD has already been created but you need the money then you should remember that surrendering the FD before two months can get you much lesser amount than the normal savings amount. A 5 year fixed deposit is a tax saving deposit and is locked for five year duration.

  • Method of Calculation of Interest Rate on Bank FDs

There are two ways to calculate interest on Bank FDs- Simple Interest and Compound Interest. Now Simple interest yields a lesser amount on maturity date on the money invested. But compound Interest yield higher returns simple because the method of calculation is different. A point to be noted here is that if any amount is invested for less than six months then the method of calculation for interest is Simple Interest and for more than six months is compound Interest. Compound interest can be done monthly, quarterly or annually with monthly yielding higher returns than quarterly and annually. Hence you should always glance at the duration as the calculation and the calculation of interest rate depends on it which in turn affects your maturity amount.

  • Interest Rates

This is probably the most important factor to judge the amount you would get after maturity.

Since there are many banks to choose from, you can see where you get a higher interest rate for the duration you want to remain invested for. The interests are always higher for a senior citizen (usually above the age of 61) so it’s better to get a joint account with a family member and invest at a higher interest rate which will yield higher amounts.

  • Penalty Charges

Even though in recent years banks do not to charge penalty charges, there are many that still do. The fine prints therefor hold importance here. Penalty charges are often charged on premature withdrawal or breaking of FD. Insuch cases you will get a lesser amount on the existing interest rate calculated till date and not the original amount calculated on the original interest rate. For e.g. You initially fixed INR 100000 with the bank for one year @10% and are actually breaking your FD after 6mths and the existing interest rate for 6 mths is 8.25% then you will get interest on INR 100000 @ 8.25% for 6 months not 10% for one year.Now in such cases some banks also charge 1% penalty along with a lower interest rate for premature withdrawal and this amounts to a huge loss.

  • Payment Method

There are many options available with the bank and which ever suits you can choose. But the best is to reinvest the principal and the interest so that a higher amount can be received on maturity instead of timely/monthly payment of interest.

  • Services of the bank

I know this is a point which sounds a bit weird but it is so very true. Even, if a bank has the best interest rates for the right duration just as you require, it may still prove a worry if the bank staff does not act on time. In some cases, bank renew the matured FD automatically without asking and when the customer tries to surrender the FD, a penalty fee is charged and mind you this is as per the guidelines. So you have to put money and fix it in a bank that is quick to respond and makes you aware of the fine prints, which otherwise would just get unnoticed by you!

So happy investing and above all be aware!

© 2012 Deena Zaidi. All rights reserved.