Tip 1: Look for security If you thought that to invest your funds in fixed deposit is easy, think again. There are several factors, which have to be taken in to consideration while choosing a bank or a Non-banking finance company [NBFC] to deposit your funds. The first and foremost is the security of your funds. This is so because if the company where you intend to deposit your funds is among the defaulters, you may even lose your principal amount, forget the interest component.

There are several credit rating agencies, which rate the Banks and the NBFCs on the basis of some variables. The better known of these credit rating agency include Icra, Crisil and Care. The variables include the profit, the stretched liquidity position, the asset quality and cushion available for absorbing the provisions and write off burden. On the basis of the variables, the institutions are rated as AAA, AA, A, B or C respectively.

What the ratings signify:

Ratings	Indications
AAA	Highest safety
AA	High safety
A	Moderate safety
B	Risk
C	High Risk

Tip 2: Check the returns Apart from the security, the returns play an important role. In fact the amount of returns are the main deciding factor in case of FD (fixed deposit). These returns may be on an annualised basis or on a compounding basis. If it is on an annualised basis, then the returns are easy to calculate and compare with others but more often than not, these returns are on a compounding basis. Again in case of compounding interest, it may be monthly, quarterly or half yearly.

Tip 3: Effects of compounding The compounding rate of interest is more beneficial than the annualised returns. The more the frequency of compounding, the better it is for the investor. Accordingly, the monthly compounding is better than quarterly compounding rate of interest, which in turn is better than the half yearly compounding rate of interest. For e.g. If a person has invested Rs 10,000 each in fixed deposits for 1 year @12% on a monthly compounding, quarterly compounding, half yearly compounding and on an annualised compounding interest, the returns would be as follows.

Returns on fixed deposit of Rs 10,000 @12%	Returns receivable in (Rs)	Effective interest yield
At annualised compounding	11,200	12.0%
At half yearly compounding	11,236	12.4%
At quarterly compounding	11,255	12.6%
At monthly compounding	11,268	12.7%
On a daily compounding	11,275	12.8%

It is apparent from the table that the returns increase with the increasing frequency of compounding.

Tip 4: Decision Making People, who are more concerned about the security part of the money than the returns, prefer to deposit their money only with those banks and NBFCs, which are considered to be the safest. For some people, adequate safety is enough as long as they get moderate returns. Others who are just concerned with higher returns overlook the risk involved and tend to go for ‘B’ or ‘C’ rated institutions. No doubt, they get much higher returns than their counterparts who invest in ‘A’ rated institutions, but they stand an equal chance of losing their principal amount as well. So, you have to make a choice between the security and higher returns.

Tips 5: Service Once you are through with this, it is important to consider the service factor. Servicing also plays a major role in the decision making process. It should not be the case that you have to run about from pillar to post to recover your money. You should keep in mind that this thing counts a lot considering our hectic and busy schedule.

Tip 6: Choice Some banks and NBFCs are offering the facility to deposit and withdraw your money through the net-access. This is how the fixed deposit would be operated in the near future. Nevertheless, you will still have to make a choice between security and high returns. It's always better to be safe than sorry.

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