How to Secure Your Savings and Grow Wealth with High Interest Rate Fixed Deposits

With the increase in interest rates over the past year, Fixed Deposits (FDs) have become one of the preferred investment options for many Indians, especially those who prefer investing in low-risk and fixed-income financial instruments. However, since the FD interest rates are already at their peak, they may stop continuing to rise further soon. Hence, this could be the right time to take advantage of the Bank Fixed Deposits offering high interest rates to secure your savings and grow wealth with a low-risk investment avenue.

Bank Fixed Deposits continue to hold an important place in investment portfolios, even amidst a variety of exotic investment products. This is because -

• A Fixed Deposit is a secure investment with very low risk to your investment, and its returns do not fluctuate with market conditions.

• FDs can offer stable returns even in uncertain market conditions, making them a tool for portfolio management.

• A Cumulative Fixed Deposit can be used as a wealth creation option.

• Banks offer credit facilities like loans or overdrafts to their Fixed Deposit account holders, allowing them to borrow funds at affordable interest rates without liquidating their investments, with interest rates typically 1-2% higher than the FD interest rate, and the option to borrow up to 90% of the FD amount.

• There are various types of Fixed Deposits to choose from based on your needs; if you want higher returns and don't need regular interest pay-outs, go for Cumulative FDs, and if you want to save on taxes, a Tax Saver FD is a good option with tax exemption on the principal amount up to Rs 1.50 lakhs under Section 80C of the Income Tax Act, 1961.

• FDs offer flexible investment terms ranging from 7 days to 10 years, allowing investors to choose a term based on their financial goals.

• In case of a financial emergency, you can withdraw your Fixed Deposit before maturity, but a penalty of 0.5% to 1% on the interest rate may be charged depending on the amount, enabling quick access to funds.

Investing in bank FDs is essential for those who prefer secure and steady wealth growth without taking risks. Besides, it is also wise to allocate some money to Fixed Deposits for portfolio diversification. Therefore, many people and institutions invest in Bank Fixed Deposits, but it is important to choose a reputable bank and maximise returns by following certain strategies.

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Here are some tips that can help you yield a better rate of returns on Bank Fixed Deposits:

1. Invest in FDs when interest rates are high:

Starting from May 2022, the Reserve Bank of India has increased the repo rate (at which the RBI lends money to commercial banks) several times, which in turn led to an increase in Fixed Deposit interest rates. Hence, this is the right time to invest in Fixed Deposits to yield better returns. However, one should exercise caution and avoid banks that offer an overly high interest rate as it comes with a higher risk. Currently, many leading banks are offering 6.5% to 7.5% interest rate per annum for Fixed Deposits with a tenure of 1 to 3 years, which is the popular FD tenure among investors.

2. Plan your Bank FD by choosing the right FD tenure:

It makes sense to invest in bank FDs for a longer duration if the interest rate offered for that specific duration is higher as the power of compounding can help beat inflation. However, make sure your investment decisions is in line with your financial goals and liquidity requirements.

Suppose you have a short-term objective that will be completed in a few months or you want to establish an emergency fund. In that case, it would be more practical to invest in a short-term fixed deposit with the cumulative plan rather than choosing a longer maturity and withdrawing early, which incurs a penalty.

On the other hand, if you have a long-term financial goal, it would be wise to choose a bank FD with a longer maturity and a cumulative plan. However, take note that the FD interest rates are typically lower for longer tenures of more than three years.

Additionally, senior citizens who desire a regular income source can choose between monthly or quarterly interest payments directly to their bank account.

By carefully selecting the fixed deposit tenure, you can avoid keeping more money in a savings account that earns a lower interest rate.

3. Opt for a Flexi Fixed Deposit:

A Flexi Fixed Deposit can help investors who are unsure about the FD tenure. With a Flexi Fixed Deposit, you have the option to withdraw money from your fixed deposit account as and when needed, without incurring a penalty. This provides flexibility to investors who may not know how long they will need to keep their money invested.

Furthermore, certain banks offer the option of an "auto sweep-in" facility, which allows you to transfer funds from your Savings Bank Account into a Fixed Deposit account automatically when the balance exceeds a specific threshold, say Rs 25,000. This is an efficient technique to save money, as excess funds in your Savings Bank Account will automatically be invested in a FD, allowing you to earn higher returns than your Savings Bank Account.

4. Keep Your FDs on Auto-renewal:

Renewing your investments is a beneficial strategy for building a larger corpus over time, as it allows the power of compounding to work in your favour. Compounding is the process of earning interest not only on the principal amount invested but also on the accumulated interest over time. Therefore, reinvesting your returns can generate more significant returns over the long term.

When your Bank Fixed Deposits reach maturity and you do not need the funds immediately, it is advisable to renew the FD for an appropriate tenure. This means that instead of withdrawing your funds from the FD, you should reinvest the principal amount along with the accumulated interest earned during the previous term. By doing so, you can benefit from the compounding effect and earn interest on the total amount invested. Auto-renewal can avoid the hassle of reinvesting your funds and you can enjoy a continuous flow of interest income.

Therefore, if you do not need the funds from your maturing FD immediately, it is a wise decision to renew the FD for an appropriate tenure, allowing the power of compounding to work in your favour and build a larger corpus over time.

5. Do Not Withdraw Your FD Prematurely:

In order to get the most out of your Fixed Deposit (FD), it is important to avoid withdrawing it prematurely. This can hinder the power of compounding and make it difficult to create wealth, which could prevent you from achieving your financial goals.

Although the interest earned on bank FDs is subject to taxation, it is still a straightforward and effective way to start building your investment portfolio. Another option is to invest in a Tax Saver Fixed Deposit if you are investing for a longer tenure of 5 years or more.

Should you invest now in the Bank Fixed Deposit?

Given that FD interest rates have already reached their peak, it is possible that they may not increase further. Therefore, now may be a good time to take advantage of high-interest FDs to secure your savings and grow your wealth through a low-risk investment option. However, take note that FDs typically offer attractive interest rates only for a short duration of 1 to 3 years. Hence, it might not make sense to invest in Bank Fixed Deposits for your long-term financial goals that need investment in options that have the potential to yield inflation-beating returns.

Furthermore, FDs are typically best suited for those seeking guaranteed returns in the short or medium term with lower risk. When investing, it is important to remember the saying "don't put all your eggs in one basket". Before investing in any financial instrument, it is essential to create a solid financial plan, define your investment objectives, assess your risk tolerance, and choose the right mix of investment options. Remember that proper asset allocation is key to successful financial planning. High-interest bank FDs are a good option to invest in to mitigate investment risk, diversify your portfolio, and create a contingency fund. Hence, you may consider investing a portion of your total investments in Bank Fixed Deposits after considering your goals, risk appetite, and investment horizon.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.