5 Tips To Maximise Fixed Deposit Returns

A recent study by Kuvera, an online investment and financial planning platform, revealed over 44% of the respondents invested in a fixed deposit when they would likely need the money within three years. Fixed deposits (FDs) are among the most popular investment options, as found by the survey.

Ease of investment, guaranteed fixed deposit returns, liquidity, flexibility in tenure and amount, and more reasons make FDs a popular investment choice.

Do you have FDs in your portfolio or intend to invest in them? If yes, read on to learn how to maximize your FD returns.

Fixed Deposits: A Brief Overview

Fixed Deposits are investment instruments that give guaranteed returns for a fixed duration. The investor opens an FD account with a bank, or other financial institution (FI), and deposits a fixed amount for a pre-determined time, at a fixed rate.

The depositor can choose a duration ranging from 7 days to 10 years based on their requirement. Interest on fixed deposits also varies depending on the duration and the bank or FI policies.

Even though FDs are for a fixed term, most FIs allow depositors to withdraw funds before the due date, except for tax deposits. In some cases, there may be an initial lock-in period; the rate is adjusted based on the duration for which the depositor keeps funds with the bank.

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How To Maximise Your Fixed Deposit Returns?

Investors may sometimes think that interest on fixed deposits is fixed, so there is not much one can do to improve the fixed deposit returns. However, that is not the case. Following the right investment strategy can help maximize FD returns. Below are a few tips that can help investors improve returns on their deposits.

1. Focus on Yield and Not FD Rates

When comparing deposit schemes from various banks, investors tend to focus on the interest rate. However, it is crucial to focus on the yield, as that denotes the actual FD returns. Some schemes compound interest on fixed deposits annually, while some may compound it quarterly. The table below compares the maturity value for different compounding frequencies.

The above table shows that the same amount invested, at the same rate and duration, but compounded at different intervals, yields different maturity values. The more frequent the compounding, the higher the actual fixed deposit returns are. A fixed deposit return calculator can help the depositor compute the actual yield and make an informed choice.

2. Cumulative Plans Are Better Than Traditional Plans

When choosing a fixed deposit plan, investors can opt for a cumulative or traditional option. In the former option, investors do not receive any payout during the FD term; they receive the entire interest on fixed deposit when the FD matures. In the traditional plan, investors may get monthly, quarterly, or annual payouts, depending on their choice. Cumulative deposits earn interest on interest. Hence, despite interest on fixed deposits being the same as traditional plans, the returns are higher due to the power of compounding. However, if the goal is to earn a steady income, a traditional FD with regular interest payouts is more suited than a cumulative one. The investor can compare the yields of both options with a fixed deposit return calculator.

3. A Laddering Strategy Can Help

When an investor deposits money in a cumulative FD option, they know they will receive the principal plus interest and maturity. However, what happens if one needs funds before maturity? A premature withdrawal will reduce the FD returns as banks adjust the rate based on the duration. An FD laddering strategy will help you deal with such a situation without breaking deposits and help in earning higher fixed deposit returns over time. In this strategy, investors split the investment into multiple deposits for different durations rather than making a single investment. For example, instead of investing Rs 400,000 for five years in a single FD, one can choose to make one deposit of Rs 200,000 for five years, one each of Rs 100,000 for 1 and 3 years. If they do not need the money, they can reinvest the amount. Laddering deposits provides investors with liquidity. It also helps in averaging out the interest rate changes over time and is a good option to maximize FD returns.

4. Stay Invested Till Maturity

One of the advantages of fixed deposit investments is their liquidity, which makes it easy to make premature withdrawals when required. There may be times when one may need funds before an FD matures, and the depositor may consider making a premature withdrawal. As mentioned earlier, withdrawing before maturity will reduce the fixed deposit returns. Instead of a premature withdrawal, the depositor can consider taking a loan against the deposit or an overdraft against the FD. Here the depositor has to consider the amount required and the duration for which they will need the funds. The depositor has to pay interest only on the amount used for the number of days the funds are used in case of a loan or overdraft against an FD.

5. Consider Tax Implications

Interest on fixed deposits above a fixed threshold in a financial year (FY) attracts Tax Deduction at Source (TDS). Submitting for 15G (15H for senior citizens) can help investors save tax deductions and improve overall returns. Residents whose total income from interest on fixed deposits will be below Rs 40,000 in an FY (as per current rules, FY 23-24), and whose income is below the basic exemption limit, along with zero tax liability on taxable income, can submit form 15G at the beginning of the year. For senior citizens, total income from FDs should be below Rs 50,000 to submit Form 15H. Apart from that, investors can also adjust the deposit amount or the FD tenure for tax optimization. A fixed deposit return calculator can help choose the right combination of amount and duration for tax optimization.

Find Your Strategy

Fixed deposits are a preferred choice of investment for many in India due to the combination of advantages they offer. Understanding the difference between interest and yield, staying invested till maturity, efficient tax planning and laddering are a few ways to maximize your fixed deposit returns. Researching well before investing helps select the best options that align with your financial goals. Platforms such as FinoBuddy can be an investor's true friend and help them understand and avail of some of the best solutions available in the market.

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