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While fixed deposits (FDs) are great for savings, choosing the right tenure for your FD can be crucial for your financial goals. Here’s how you can select the right tenure and maximise returns.
What is a fixed deposit?
A fixed deposit is a financial instrument offered by banks. When you invest a lump sum for a set period, it will yield returns at a fixed interest rate. FDs are popular for their safety, stability, and guaranteed returns. For those looking to grow their savings without exposure to market risks, an FD is a great option.
How to choose the right tenure?
Before deciding on the right tenure, evaluate the purpose of the fixed deposit. The tenure of the FD has to align with your financial goals and liquidity needs. Decide whether it is for an upcoming financial commitment, or is part of your financial planning after retirement, etc.
FDs can be broadly classified into three categories based on tenure:
- Short-term FDs (7 days to 1 year): Perfect for those needing liquidity for short-term goals or unexpected expenses. They offer the flexibility of short lock-in periods while still providing better returns than a savings account.
- Medium-term FDs (1 to 3 years): Ideal for mid-term objectives like buying a vehicle or planning a holiday. They strike a balance between earning higher interest rates and having a manageable lock-in period.
- Long-term FDs (3 years and above): Best for long-term goals such as education, marriage, or retirement. These FDs are perfect for wealth accumulation over an extended period.
How tenure affects the rate of returns
The tenure of your FD significantly determines the interest rate. Usually, longer tenures mean higher interest rates, but this needn’t be the norm. In some cases, banks tend to offer special-term deposits that may offer nominally higher returns. With a little bit of research online, this can be determined.
Example: Karur Vysya Bank's 760-day (2 years & 30 days) fixed deposit offers an attractive interest rate of up to 8.10% for senior citizens and 7.60% for the general public and NRIs. These rates hit the soft spot by offering better interest rates than even the long-term FDs, albeit for a shorter term.
Pro tip: Laddering strategy
To maximise your returns and maintain liquidity, consider diversifying your FD portfolio across different tenures; a popular strategy known as laddering. This approach minimises the risk of having all your funds locked in for one fixed period, providing both flexibility and potentially higher returns.
By laddering your deposits, you can ensure regular access to your funds and benefit from the different available tenures, while maintaining good liquidity.
22 July 2024
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