According to the “bird in the hand” theory, the longer the tenure of depositing the money, the higher the compensation or return would be. For choosing the optimum duration for fixed deposit, it is important to understand the rate of interest cycle. With fixed deposit term, the interest rate is usually fixed for specific time duration. From the time when you open an account, the investment will earn you the interest rate at the same rate until the end of the term.
Since the interest rate you sign for is guaranteed on the quantum of return, the term deposits at best FD rates are the best investment options. This is because the returns here don’t depend on the share market or what RBI decides for the short-term rates.
Now the question arises, how to decide the best size and lock-in period for fixed deposit? Here’s how you can make the best decision to accurately size and lock-in the best-fixed deposit rates.
Size of Deposit:
- a) Various banks or NBFCs provide you varying best FD rates depending on the deposit size. For instance, the return on investment for a deposit of up to INR 1 crore is different from the deposit above INR 1 crore.
- b) There could be some uncertainty to your future fund requirements. In such cases, it is best to split your deposit amount into small denominations for avoiding interest loss for premature closure. The INR 1 Crore for three years term could be divided into 10 receipts of INR 10 lakh. If the depositor requires INR 10 lakh for meeting an exigency after one year, he/she could easily withdraw needed funds by closing your single deposit. The remaining deposit will further continue to earn interest at the guaranteed ROI.
- c) According to the ALM policies, several banks and NBFCs charge a penalty on sudden premature closures. However, the smaller deposits are exempted from any such penalties. The depositor must keep in mind the above aspects when deciding the size of their FD deposits.
Lock-In Period for Deposits:
- A) Depositing money with a bank is an important investment decision just like any other decision in life. The lock-in period for FD deposit is based on the depositor’s expectation to utilize his/her financial plans. For example, funds required for the child’s education must be invested for suitable maturity funds that are available on time for meeting the expenditure needs.
- b) Banks or NBFCs also provide best FD rates in India on deposits at different maturities, depending on the financial institution’s ALM policy and general outlook on the future interest rates. The depositor must usually choose minimum lock-in period offering maximum return on investment, especially in the case of an increasing interest rate scenario and vice versa.
You can make the right decision by having a better understanding of rising and falling interest rates. The interest rates usually go up or down as per the changing cyclic movement of long-term investments. So, avoid making investments when the interest rates are at their low points. Wait for the time when interest rates increase again and then lock the investment.