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about FDs
Is it better to lock your money in a fixed deposit account or use it in
other investment options? We help you make the right decision
Fixed deposit (FD) is an investment option that allows you to invest a sum of
money for a fixed time period and at a fixed rate of interest. During the
course of the FD, even if the prevailing interest rates go up or down, you will
be entitled to the rate of interest that was committed to you.
Raajan / Mint
Two types
2. Corporate FDs: These are offered by companies that are looking to raise
money from the open market. Corporate FDs typically pay a higher rate of
interest, but also carry a relatively higher risk than bank FDs.
Advantages
• FDs offer a safe return: FDs are usually secure and are very low-risk
investments. Bank FDs are guaranteed up to Rs1 lakh by the Deposit
Insurance and Credit Guarantee Corporation.
• You can raise a loan against your FD: You can borrow up to 85% of
your deposit amount (in some cases, only after a few months of your FD’s
existence). This is valid only for bank FDs.
• Choice of time period: You can make a deposit for any period of time,
from 15 days to 10 years.
Disadvantages
• Relatively low returns: Because FDs are very low-risk instruments, they
offer low returns compared with alternative investment options such as
stocks and mutual funds.
• If you do not fall in a taxable slab, then furnish Form 15G or 15H to your
bank to prevent TDS on the interest income that is paid to you.
2. FDs from companies might pay more but come at a much higher risk than
bank FDs. These FDs are not deposit-guaranteed.
3. In times of rising inflation, avoid FDs because your money will lose its
purchasing power.
4. When making a deposit, check the penalty clause for early withdrawal.
6. You might want to split your investment and make multiple deposits in
small sizes and spread them across different maturities as opposed to
making a single large deposit. This way, even if you do have to make a
premature withdrawal, you will not pay a penalty on the entire amount but
just on the limited amount you withdraw.
7. For FDs longer than a year, if your interest is paid at maturity, the taxes
on interest income from your FDs are due on interest earned, even if the
interest hasn’t been received by you.
(Kartik Varma and Dhruv Agarwala graduated from Harvard Business School
and are co-founders of the New Delhi-based iTrust Financial Advisors)
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When buying a house, don’t ignore hidden costs such
as the money required to get the property registered in
your name, additional charges the builder might levy
for preferred location, club membership, parking and
sundry expenses.
Calculate the full cost of buying a house by including all these expenses in
addition to the basic sales price of the property. These expenses will also be
an outflow of cash and you must not be thrown off by them so much that
you can’t afford your dream house.
DO