We all love to have options in our day to day lives. Similar is the case with investment options. Multiple investment options give investors the scope to select their preferred investment options after comparing it to various investment avenues available. Fixed deposits or FD is a popular investment option for many individuals. It is a risk free and can give you returns higher than a savings account. Fixed deposits also come in different shapes and sizes. The different fixed deposits cater to different needs of the customers.
Although fixed deposit is one of the best investment avenues for investors who want to invest in safe avenues, withdrawing from fixed deposit during an emergency can be little problematic. Withdrawing the principal and the interest is not permitted before the maturity date and penalties may be levied if the fixed deposit is withdrawn before the maturity date. To make fixed deposits flexible and liquid, many banks have introduced flexi fixed deposits. Flexi fixed deposits is linked to a savings account and as a result you can redeem certain sum of money from flexi deposits during emergencies. You don’t have to pay penalties for withdrawing from flexi fixed deposits. You can withdraw from the bank by intimating the bank. However, the facility may not be available to all customers. Flexi fixed deposits is not the default option. It is because flexi deposits come with a cost as banks have to arrange for the funds from other resources to pay it to the customer. Also, there is a high chance that people will make more premature withdrawals from the fixed deposits.
We are all aware of the fixed deposits that are offered by the various banks. However, corporates and non-banking financial institutions also offer fixed deposits which are called corporate fixed deposits. Although corporate fixed deposits is not very different from the bank fixed deposits. You can apply for corporate fixed deposits from the company’s website or any aggregator website.
However, there are a few fundamental differences between a bank fixed deposits and a corporate fixed deposits. One of the most important differences is the risk. Corporate fixed deposits carry higher risks than bank fixed deposits. While there is no risk while investing in a bank FD, corporate FDs come with default risk. The issuer company may not be able to give the maturity amount at maturity if the company has gone bankrupt or due to other market reasons. As a result, the interest rates given by corporate fixed deposit is higher than bank FD. The interest rates given by a corporate fixed deposit is 1-3% higher than bank FDs.
Before you are tempted to invest in a corporate fixed deposit because of the higher interest rates, here are some of the things you need to check before investing.
The corporate FDs are given various credit ratings by credit rating agencies. The credit rating indicates the credit worthiness of the company which is the probability of receiving the principal and interest on the maturity date. Hence, it is important to opt for a corporate FD that has a high credit rating. You should also check the repayment history of the company which will help you to understand the financial credibility of the company.
Other than commercial banks, non-banking financial institutions and corporates, cooperative banks also offer fixed deposits. These banks offer attractive interest rate. While the interest rates of commercial banks are moving south, cooperative bank FDs is a good investment option for retired individuals and housewives. It fetches an extra 2-2.5% per annum. However, with high interest rate comes even a bigger risk. In the past, many cooperative banks have failed to pay back the matured amount to its customers.
Cooperative banks strive for financial inclusion and give loans to farmers, small traders and self-help groups. It is seen that at many times, the customers are unable to pay back the loan amount due to crop failure etc. As a result, co-operative banks may have a hard time paying back the deposits to its customers. Also, it is hard to ascertain the financial health of the bank as financial statements are not readily available to the public at large. Hence, investors should not deposit huge amount in such banks and limit to Rs. 1 lakh as deposit up to Rs. 1 lakh is insured under the deposit insurance scheme.
Fixed deposit is one of the easiest ways to save for your child’s future. While few banks allow children and people below 18 years to open a normal fixed deposit under the guardianship of their parents, few banks have fixed deposits especially for savers under 18 years of age. Parents or a guardian handles the account till the kid attains maturity.
One of the benefits of children fixed deposit is the low minimum investment amount in such fixed deposits. PNB Balika Shiksha Scheme and Allahabad Bank Sishu Mangal deposit scheme are two such fixed deposits.
PNB Balika Shiksha Scheme is especially meant for the girl child. All girls who have passed 8th standard (except students from private unaided school and central government schools) can invest in this fixed deposit. The deposit amount can be withdrawn after the girl child turns 18. Interest received from the fixed deposit is exempted from Income tax.
Allahabad Bank Sishu Mangal deposit scheme is another fixed deposit for children between the ages of 1-15. A predetermined amount has to be invested periodically which will grow to Rs.5,000 or its multiples. The fixed deposit comes with an expiry of 6 years and no deposit can be made after the child reaches 21. Also, there is no limit on the maximum amount that can be deposited under this scheme.
Investing in fixed deposits can help you to save money and achieve your financial goals. Fixed deposits are offered by banks, corporates and cooperative banks. These fixed deposits have different features and it is meant for different types of investors. If you don’t want to take risk, bank fixed deposits can be an ideal investment option. On the other hand, if you want to earn higher interest and don’t mind the extra risk, corporate fixed deposits can help you to achieve your financial goals faster.
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