Covid-19 pandemic has made us feel uncertain about many things; most indicators suggest that the economy has bottomed out and the jury is still out about its recovery. When the stock market crashed between February 20 and April 7 (many referred to this as the coronavirus crash) several people took their money out of equity mutual funds to invest in fixed deposits (FD), ignoring the long-term prospect of wealth creation that corrections allow.
The predisposition towards capital protection and income certainty pushes more people to lock away their money in FDs even though interest rates have fallen sharply in the past year. However, not all FDs are the same.
FDs are great financial instruments to invest in. But not all FDs are the same nor is it beneficial to invest in them for long periods. Though deemed the safest among all investments, it makes sense to check the pros and cons before buying one. Here are a few things to keep in mind.
Go for scheduled banks
Scheduled banks work as per the rules mandated by the Reserve Bank of India (RBI). People flock to scheduled public sector and major private banks for their FDs and avoid non-scheduled banks like private or small finance banks, even though they may offer high slab rates. However, with amendments to the Banking Regulation Act, co-operative banks are now under the supervision of the RBI.
â€œThe amendments are expected to facilitate the making of reconstruction or amalgamation schemes. Earlier, the RBI introduced exposure limits, mandating reporting of large exposures to the Central Repository of Information on Large Credits. These steps are expected to improve the governance situation that ails several co-operative banks,” Adhil Shetty, chief executive officer, BankBazaar, an online market place for financial products and check the credit score, said.
As the funds are insured separately, deposits of up to â‚¹5 lakh are covered in case of a collapse.
Avoid investing for long periods of time
The slowdown in the economy has caused market interest rates to fall. However, with anticipated economic revival, credit demand is expected to increase post-pandemic, thus prompting a rise in market rates. Opening FDs for a long tenure now may lock your FDs with low-interest rates for a long time, said Sahil Arora, director, Paisabazaar.com, which provides virtual debt syndication services plus business support system of banks and financial institution. Instead, he advises depositors to invest in shorter duration FDs. â€œDepositors should prefer FD tenures of one to two years even if they have financial goals of longer time horizons. This will allow them to re-invest their FDs at higher rates later, as and when the interest-rate cycle turns, without resorting to premature withdrawals,” he said. Besides, investors have to pay penalty ranging between 0.5 and 1% of the interest amount if they withdraw the money prior to the maturity date.
Many FD investors believe that their tax liability ends with payment of Tax Deducted at Source. However, the income earned as interest on the FDs is taxable barring the interest income up to â‚¹50,000 earned by senior citizens.
Suresh Sadagopan, founder, Ladder7 Financial Advisories, a professional financial planning and wealth advisory firm, said, â€œMost people only look at gross returns and not post-tax returns. FDs attract tax at oneâ€™s income slab rates and one must factor this before deciding to invest.”
Archit Gupta, founder of ClearTax, an online e-Filing website said that factoring income tax liability is important. â€œThe interest earned on FDs is added to your overall income and taxed at the income tax slab rate you fall under. This is of a great disadvantage if you fall in the highest tax bracket,” he said.
FDs are an essential component of an investment portfolio. There is no right time to put aside money in FDs, which means that you can always allocate a portion of your savings in them. However, do not put all your money in FDs as they are other financial instruments that can help grow and save your money.
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