One of the many important conversations that the pandemic instigated was around money, savings and investments. At a time when salaries were slashed and organisations were downsized, the availability of an emergency fund or a consistent source of income became critical to many.
There is a noticeable increase in people and institutions dishing out valuable advice to the common man about ways to save and invest, and rightly so. Your money is serious business, and how you use it to your advantage to secure your present and future, needs proper consideration.
With an increasing number of people being conscious about looking at investing from a wealth perspective, when does it make sense to keep your money in traditional options like Fixed Deposits(FDs) and Recurring Deposits(RDs)? Let us first understand what FDs or RDs have to offer.
Deposits with banks earn you a periodic income based on interest rates
Fixed and Recurring Deposits with banks have a predetermined interest rate.
For example, if you have an FD with RBL Bank, you can earn higher interest rate on your deposit amount. This income is either paid to you quarterly, semi-annually, annually, or when your FD is up for redemption.
Pro Tip: FD or RD interest is a taxable income. Hence you should always take post-tax interest rates into consideration as well as be on the lookout for a reliable banking partner that offers the best fixed deposit interest rates.
Let us now understand how to determine whether FDs and RDs are for you. As is the case with all investments, you must start with a goal.
What is your Saving or Investment goal?
You need to ask yourself –
- “What is my savings or investment goal?”
- “Why am I keeping this money aside for?”
- “When do I intend to use it?”
From a goal perspective, when do you invest in an FD or an RD?
1. If it’s a rainy day fund that you are looking at
Every financial advisor will tell you to have an emergency fund at your disposal. The objective of an emergency fund is to have liquidity – which means money that you can access whenever you want. If you have a regular income stream like a salary or business income coming your way, you must certainly have a regular flow of expenses that you absolutely have to bear.
You had to pay for living expenses even when work, salaries and businesses came to a momentary standstill during the initial days of the pandemic – which is the best example of an emergency and the absolute need to have one.
Regular FDs and RDs are great means to create and hold that emergency fund for you. If you have a substantial amount of extra money with you, keeping it in a Fixed Deposit with high interest rates is a great way to park that money for a rainy day. If you prefer to keep aside smaller amounts of money every month, a Recurring Deposit is a great way to create that emergency fund slowly and steadily.
2. If you want a parallel, consistent source of income
Banks offer interest on your FDs and RDs, and the payouts can be set as per your preference. If having a consistent side income interests you, you can invest a portion of your extra money in a Fixed or a Recurring Deposit.
Since the interest in both cases is simple interest (calculated periodically only on your base amount), you can only expect higher interest amounts when your FD or RD investments are sizable. By the way, RBL Bank offers some of the highest fixed deposit interest rates. More on that here.
3. If you are saving up for short term goals
Say, you want to keep aside some amount of money for your yearly vacation; or keep some additional amount ready for the year end when there are many additional one-time expenses to be made and there is always a cash crunch, Fixed and Recurring Deposits are great options. They are suitable for saving money for similar small, achievable goals for the near future.
Some other benefits that you can unlock with FDs and RDs
- Both Fixed and Recurring Deposits are low-risk instruments. This means that the money that you have invested stays intact at all times, making these a good option for senior citizens, who do not wish to keep their life’s savings in riskier investment options. Even other age groups can keep a portion of their investment in FDs and RDs to have a balanced portfolio, or basket of investments.
- If you are looking for tax saving investment options, you can opt for tax saver FDs. These investment amounts can be deducted from your total income under Section 80C of The Income Tax Act, 1961. Tax saver FDs usually have a minimum lock-in period of 3 to 5 years, during which period your money has to stay invested.
- If you have excess money lying idle in your Savings Account, it is always better to save it in an FD. You get a comparatively higher rate of interest on Fixed Deposits as compared to your Savings interest.
- FDs and RDs also enable you to avail quick loans or overdrafts against the amount that you have invested. It’s a great way to manage sudden or bigger expenditures while keeping your savings intact. On an average, you can avail an overdraft equivalent to 80-90% of your investment amount.
- The tenure of a regular FD is pretty flexible, and can start with as little as 1 week. It’s a convenient way to park your money aside for the time being instead of accidentally spending it all.
- FDs or RDs are easy to understand and execute for people of all ages. Convenience banking with RBL Bank allows you to start FDs and RDs online with absolute ease!
The Bottom Line
Fixed Deposits and Recurring Deposits are right for you if you are investing in these with a goal-oriented approach. These are low risk investments, and having them in your portfolio is a great asset even for a seasoned investor.