5 things investors to look for in an FD

[K.Karthik Raja]

5 things investors to look for in an FD


A fixed deposit probably ranks as the most conventional investment
avenue for domestic investors. More importantly, given its offering,
it makes an apt choice for risk-averse investors. In this article, we
present five things investors must look at in an FD.

1. Credit profile

The fixed deposit's credit profile is an indicator of the degree of
risk associated with it in terms of timely repayment of the principal
and interest payment. For example, an 'AAA/FAAA' rating is indicative
of the highest level of safety. Typically, an FD with a higher rating
would offer lower returns vis-�-vis an FD with a lower rating.

The additional return in a lower rated FD is in effect a compensation
for the higher risk borne. Investors would do well to decide on the
quantum of risk they are willing to bear and then select an FD.


2. Rate of return

Rate of return or interest rate indicates the return that the FD
investor will clock. At any point in time, it is not uncommon to find
various entities like banks, small savings schemes and corporates
offering differential returns on similar rated FDs. Investors on their
part would do well to scout various options and select the FD that
offers them the best return at a rating that suits them.


3. Interest payout options

Investors can generally choose between various interest payout options
like monthly, quarterly, annually or on maturity. Ideally, the
investor's need for liquidity should be used to determine which
interest payout option is chosen. Selecting the interest payout 'on
maturity' option can help investors benefit from the compounding
effect and clock a higher return.


4. Tenure

The FD's tenure is the period over which the investor stays invested.
By and large, a longer tenure translates into a higher rate of return.
Investors must match their investment tenure with their needs/
objectives. For example, if the investor has an expense to meet 3
years hence, he can invest an appropriate amount in a 3-year FD to
ensure that the maturity proceeds match his future obligation.

On the same lines, if there is a 5-year investment tenure, then
investments can be considered in tax-saving FDs; this will help the
investor simultaneously benefit from tax sops under Section 80C.


5. Premature withdrawal

An often-ignored aspect of FD investing is the premature withdrawal
clause. Investors opting for a premature withdrawal can be penalised
by either being given a lower rate of return or zero interest
depending on the terms and conditions of the FD. Investors would do
well to acquaint themselves with the implications of a premature
withdrawal before making an investment.