With the equity markets hovering around the precariously high 6,000 levels, investors have been left wondering where they should invest in the current scenario. In the meanwhile another anticipated event finally occurred; some financial institutions accepting fixed deposits (FDs) hiked the rates on their offerings. This makes fixed deposits attractive propositions not only from the short-term investment perspective but also to park funds until better opportunities are thrown up by the equity markets.
We present a few pointers which FD investors must consider at the time of investment,
1. Safety
FDs have conventionally been the premier choice for investors with a low risk appetite; assured returns is the key factor which attracts investors towards deposits. Stick to FDs of the highest credit rating i.e. those with a “AAA” rating even if their rates seem modest vis-à-vis those offered by company deposits.
Company deposits are unsecured in nature and investing in them would imply taking on disproportionately higher risk. If as an investor you are open to investing in instruments involving higher risk levels, market linked instruments like mutual funds may not be a bad deal.
2. Tenure
Short tenured fixed deposits continue to be your best bet. With interest rates on the ascent, a further hike in rates offered by fixed deposits cannot be ruled out. Locking your investments in longer tenured instruments may lead to an opportunity loss. Even if a 3-Yr FD looks like a lucrative proposition as compared to one which runs over a year or so, pick the short tenured one. In a rising rate scenario, you could be more than compensated for the lower returns at present.
Our views on FDs in March 2004
3. Liquidity
Find out how your FD fares on the pre-mature encashment front i.e. how easily can your investment be liquidated. Also enquire about the penalty clauses, e.g. do you suffer a loss of interest and/or principal amount. Compare how various FDs rank on this parameter and pick the best deal; thereby try to minimise the impact of illiquidity which is typically associated with FDs.
4. Additional benefits
Fixed deposits from reputed entities offer additional benefits, e.g. they can be used as collateral against which loans can be raised. Select a fixed deposit scheme which scores favourably on such parameters.
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