Fixed Deposit (FD) has always been a popular option among investors who want guaranteed returns through investments. Banks and Non-Banking Financial Companies (NBFCs) offer a variety of FD schemes for different tenures to meet the short-term and long-term needs of investors. Interest rates on FD keep changing significantly with time. Therefore, the secret to benefit from FD schemes lies in choosing the right scheme.
What is the right way to invest in FD?
Suppose you want to invest ₹ 10 lakh in FD. Should you invest the entire amount in a single FD or divide it into smaller FDs of ₹1 lakh each? Both methods have their advantages, but the final decision should be based on your financial goals, liquidity needs, risk appetite and current economic conditions. Let us see what effect investing ₹10 lakh in a single FD and dividing it into smaller amounts has on the returns.
₹10 lakh in a single FD
First, let’s look at the calculations:
Total investment: ₹10 lakh
Time: 10 years
Estimated interest rate: 7% per annum
Estimated Returns: ₹9.67 Lakh
Total amount on maturity: ₹19.67 lakh
Benefits of investing ₹10 lakh in a single FD
A single deposit is easy to manage and track. This is because you only have to track one maturity date.
Disadvantages of investing ₹10 lakh in a single FD
Possibility of huge loss in case of emergency: This is the biggest loss. If you suddenly need ₹50,000 for an emergency, you will have to break the entire FD of ₹10 lakh. Due to this, pre-mature withdrawal penalty will be imposed not only on the amount withdrawn, but on the entire amount. Protection: If you keep the entire ₹10 lakh in a single bank and that bank fails, the Deposit Insurance and Credit Guarantee Corporation (DICGC) insures only up to ₹5 lakh.
₹1 lakh each in 10 FDs
It is important to note that if you divide your investment of ₹10 lakh across 10 FDs, assuming an interest rate of 7% per annum, your final amount on maturity will be the same as if you had invested the entire ₹10 lakh in a single FD. In this example, ₹19.67 lakh.
Benefits of investing ₹1 lakh in each of 10 FDs
Less loss in emergency: If you need ₹1 lakh, you just break one FD. Interest is available on the remaining ₹9 lakh without any penalty.
Insurance cover: If you split these 10 FDs between two or three different banks (less than ₹5 lakh in each), your entire ₹10 lakh is fully insured under DICGC rules.
Interest rate averaging: If interest rates rise next year, you can reinvest your maturing ₹1 lakh FD at a new, higher rate. You are not locked into the low rate for the full amount.
Disadvantages of investing ₹1 lakh in each of 10 FDs
You have to track 10 different maturity dates and manage 10 different types of paperwork (or digital entries). Renewal and interest credit will also be different for each.
What should you do?
There is no fixed formula for choosing an FD investment option. If you like to keep things simple, have extra funds, and are confident that you will not need the money before maturity, it may make sense to invest the entire ₹10 lakh in a single FD. On the other hand, if flexibility and the ability to respond to changing interest rates is important to you, dividing the amount across multiple FDs is a better option.