Investing your hard-earned money in a fixed deposit is smart, especially if you can secure lucrative rates. In fact, such offers are easily accessible as many issuers have attractive rates, with some ranging as high as 8% or more. However, to truly leverage these rates and see serious gains, you have to pick the right tenor.
As a general rule, the longer you stay invested in an FD, the higher your returns. This is true mainly because issuers offer higher rates for longer tenors. However, the downside is that your money is locked in for the entire duration.
So, how do you pick the right FD tenor for you? For answers to the question, take a look at these 5 factors to consider.
When investing in any asset, it is crucial to check if the scheme’s objectives align with your investment goals. The primary objective of an FD investment is to generate fixed earnings on your deposit, and to provide stability all through. Alternatively, you could opt for a non-cumulative FD and set up a steady stream of income.
Here, the FD tenor you choose will be based on your objectives. For instance, if you have a big-ticket expense in 4 years, you can invest in an FD with a tenor to match and use the earnings. You can use an FD calculator to know exactly how much you stand to earn and invest accordingly.
Alternatively, if you want to generate regular income from your corpus, you can opt for the maximum tenor offered. This way, you are likely to get the highest rate offered, and you get steady, uninterrupted earnings.
Generally, issuers will offer higher interest rates on longer tenors and vice versa. So, if your goals are to generate as much interest as possible, be sure to check the tenor that has the highest rate. The easiest way to check this information is to check the issuer’s FD rates on offer, across various tenors. You will notice that the rates increase alongside the tenor duration.
Availability of Special Rates
Many financial institutions offer marginally higher interest rates for certain tenor options. You may notice that these special rates are for a set number of months, but the rate offered is quite attractive and higher than even longer tenors. These offerings are a good option to consider when deciding on the tenor for your FD.
Fixed Deposit Type
When investing in an FD, you will usually have two options – a cumulative or a non-cumulative FD. The former requires that you stay invested for the entire tenor, and get your interest earnings only at maturity. With the latter, you can get your interest earnings periodically, and you can choose the frequency. Your options are monthly, quarterly, half-yearly, and annually.
The importance of the type of FD you choose is that it can influence whether you choose a long or short tenor. This is because you stand to earn significantly more as interest if you invest in a long-tenor cumulative FD, as compared to a short-tenor FD.
This is primarily because of interest compounding, wherein the interest you earn is reinvested every year, and then it goes on to earn interest the following year. Naturally, as this cycle continues, your earnings increase. So, if you’re planning to invest in a cumulative FD, consider a longer tenor.
Portfolio Diversification and Laddering Strategy
As its name suggests, a fixed deposit comes with a fixed tenor, during which you cannot withdraw the parked funds without incurring a penalty. You can achieve a higher degree of liquidity by investing in FDs with different tenors.
This is called the laddering strategy, as it works because your FDs mature at regular intervals, ensuring a part of your investment is always available. This strategy also allows you to grow your investment at higher rates, as you can choose to invest at a time when interest rates are on the higher side.
Choosing the right FD tenor can be tricky, but you can plan for it with the FD calculator. This is a very helpful tool, and you should use it before you invest. If you decide to invest or need access to other financial instruments, get started on the Bajaj Markets App. You can download it on the App Store or on Google Play, and find issuers with lucrative rates going up to 8.60% p.a.