Fixed deposit is a high-return investment instrument preferred by aggressive and conservative investors alike. A fixed deposit offers outstanding features and spectacular convenience, from assured returns and flexible terms to an easy investment process and tax benefits. However, not everyone investing in fixed deposits gets the same interest rates, a reason why you must know the factors affecting fixed deposit returns.
5 Factors Affecting Fixed Deposit Returns
Here are the top-5 factors affecting fixed deposit returns:
Investment Tenure
The investment tenure of a fixed deposit directly correlates with the interest rate. Therefore, you can always get the best rates in a long term.
Generally, the interest rate of a 10-years fixed deposit is at least 1.5% to 3% higher than the rate of an FD of a lower tenure. The duration of FD investments usually ranges between one and ten years. Hence, you can invest in an FD to fulfill your financial goals. The tenure of a short-term FD ranges between one and three years, while the medium-term ranges between three and five years and long-term FD refer to FD above five years.
Institution Type
Fixed deposits are offered by three types of financial institutions in India. The best rates are generally provided by housing finance companies, followed by non-banking financial companies and scheduled commercial banks. However, before investing in a corporate FD, such as those offered by HFCs and NBFCs, you must check its credit rating. Credit bureaus like CRISIL and CARE rate fixed deposits in India after evaluating multiple factors. Any rating above CRISIL FAA or CARE AA is considered the best, and you can comfortably invest in such FDs to make decent profits.
Interest Type
Presently, the highest housing finance fixed deposit interest rate is around 6.70%. However, selecting the right type of interest rate for fixed deposit is crucial to get the best returns. A cumulative fixed deposit returns the principal and interest at the end of the investment period. In contrast, a non-cumulative FD pays interest monthly, quarterly, half-yearly, or annually. When you invest in a cumulative FD, the annualized yield may touch a whopping 9.13% when the interest rate is 6.70%. But if you invest in a non-cumulative deposit, you will only get 6.70%; you keep getting the interest, though.
Loan Facility
Generally, people apply for a high-interest loan or withdraw their fixed deposit investment prematurely when facing a financial crisis. However, housing finance FDs offer loans against FD facilities to all investors. All you need to do is request the financial institution to approve the loan, and the financial institution disburses 75% of the investment amount to your bank account. The interest rate is usually 2% higher than the highest rate. And the term is equal to the FD term.
Ease of Investment
An understated factor that affects the rate of return of a fixed deposit is the ease of investment. Sometimes, an investor needs to visit a financial institution multiple times to invest in a fixed deposit. This means a loss of time and money. However, some housing finance companies offer doorstep services, meaning you can open an account without going anywhere. Such convenience may indirectly increase the rate of return by reducing the pain of opening a fixed deposit account.
Conclusion
Now that you know the top-5 factors responsible for increasing the returns from fixed deposit investment, follow these steps to conveniently fulfill your financial goals.
