Allocating savings across various financial instruments is a smart way to minimise overall risk, especially when planning long-term goals such as retirement or children’s education. This strategy is known as diversification, and fixed deposits can play an important role in balancing the portfolio.
Bank fixed deposits are a trusted avenue for parking savings. They can greatly aid in diversifying your investment portfolio and tax planning.
In this article, we will discuss the role of fixed deposits in diversifying your investment portfolio and tax planning.
Understanding Diversified Investing
Diversification means investing money in various asset classes with different risk-return profiles instead of a single option. For example, one can allocate percentages across equity mutual funds, bonds, gold, and fixed deposits. The balanced allocation ensures that poorly performing assets don’t affect the entire portfolio, and some assets can keep the portfolio steady during market fluctuation.
Potential Benefits of Adding Fixed Deposits
Fixed deposits guarantee returns and principal security over a chosen tenure. They provide stability and regular income options unaffected by market disturbance. Leading banks offer government backing of up to Rs 5 lakh on deposit amounts through a DICGC certificate. Overall, fixed deposits bring ballast and income stability to investment portfolios.
Strategising FD Allocation in Investment Plans
1. Splitting Based on Time Horizons
Investors can ladder fixed deposits by spreading amounts across short and longer tenures to address liquidity needs and long-term goals. For instance, 30% of the corpus can be allocated to 1-3-year deposits while 50% is allocated towards 5-year FDs for tax savings and enhanced yields.
2. Opting for Regular Interest Payouts
Investors ensure periodic liquidity to manage routine expenses without breaking investments prematurely by stagger-selecting quarterly or monthly earnings options across different FDs.
3. Investing Across Institutions
Individuals can divide corpus across deposits from leading public, private and small finance banks to optimize FD returns and mitigate risks associated with any single institution. This also enables comparing rates across banks periodically.
4. Blending with Other Mechanisms
Alongside fixed-income assets like bonds and gold accumulation plans, FDs can enhance stability in a mutual fund-focused portfolio exposed to equity risks. The right asset mix helps balance the risk-return tradeoff.
Maximizing Returns from Fixed Deposit Investments
1. Tracking Interest Rate Movements
Before fresh investments, investors must compare FD rates across peer banks and financial institutions to benefit from the highest yields. Rates vary based on monetary policies and bank liquidity.
2. Cumulative Option for Reinvestment
Choosing the cumulative FD option allows earning returns to compound as they get added to the original deposit amount after each period. Over long tenures, this earns significantly higher returns instead of liquidating interest earnings.
3. Special Rates for Seniors
Leading banks offer add-on rates to senior citizens over 60 years, which makes fixed deposits especially lucrative. Even small 0.5% enhancements translate to large gains on maturity.
An Overview of Fixed Deposits
A fixed deposit is an investment option where funds are deposited with a bank for a specific period to earn a fixed interest rate. The bank guarantees the principal amount and predetermined returns until maturity. It is a safe and secure investment option.
Key Advantages of Fixed Deposits
Some key advantages of Fixed Deposits in Tax Planning are mentioned below:
1. Principal Protection Assured
The money in FDs lies within robust banking architecture and remains fully insured from defaults. Recently, in Budget 2020, deposit insurance cover was raised from Rs 1 lakh to Rs 5 lakh. This makes savings in FDs virtually risk-free with guaranteed returns.
2. Convenient Liquidity Access
While funds are locked in for a chosen duration, most FDs allow premature breakage by paying small penalty charges. This flexibility reduces liquidity risks associated with other tax plans.
3. Higher Returns over Savings Accounts
The interest accrued on fixed deposits is comparatively higher at 5-6% than the 3-4% offered on savings accounts and recurring deposits for similar tenure. This enables growing one’s money faster while enjoying the highest safety.
4. Relationship Building With Banks
A long-term fixed deposit helps build awareness of a customer’s saving and income habits, allowing banks to offer personalized loan products and priority services more readily later.
5. Tax Savings Avenues
Those seeking tax exemptions can invest in 5-year tax-saving FDs under Sec 80C and save up to ₹1.5 lakhs annually on taxes while earning interest income. This sweetens the overall appeal.
6. Opening a Fixed Deposit
One can start investing in FDs quickly by submitting KYC documents online or at a home branch of a chosen bank. Comparing FD interest rates and opting for a suitable payout schedule and renewal policy enables effortless investing.
Conclusion
Fixed deposits offer stability and consistent returns, making them ideal for investors prioritizing safety and income potential. Investors can mitigate risk by diversifying amounts and using customized interest payout options. Allocate them strategically within well-diversified portfolios to create long-term wealth. Fixed deposits offer benefits like liquidity, tax savings, and relationship value, making them a preferred choice for most smart Indian investors.
