| Fixed Deposit is considered as a safe haven for the investors, but there is some level of scrutiny to be done even in Fixed deposits. Fixed Deposits are not offered only by public sector banks, they are offered by large corporates, co operative banks and other financial institutions. So the FDs in non psu banks are not "totally" secure. They can technically default on payments if the financial institution is caught in a trouble. Though the occurence of such an event is very minimal, lets look at some basic fundamentals to look at before putting your money in a FD. Credit Profile Check for the credit ratings of the instruments in which the bank FD is depositing the money.The rating of AAA is of higher quality. The higher the credit rating, the lower the return it delivers. Do not chase for a FD which gives 2% extra than the other prevailing FDs, because the risk exposure is higher in such a FD. Rate of Return Check the return on FDs prevailing in the market and choose an FD which is relatively equal or slightly higher than the rest of FDs in place. Interest Payout Check out the different interest payout options. Some banks provide monthly,quarterly interest payout. Suppose you want a steady monthly income, you can opt for monthly interest payout option. If you are growth investor, you can opt for the interest to be accrued to the prinicpal in the end of an year. Duration Find a FD which matches your requirement of fund down the line. If you want fund 3 years down the line, go for a FD with 3 years duration. You will get benefited from the compounded interest rate over 3 years. Premature withdrawal penalty People often quit an lower interest rate FD and go for a higher interest rate FD. In such a case, you need to pay a penalty for breaking the FD. So you need to take into account the expense of breaking the existing FD and opt for a new FD. Thanks, Subbu |
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