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Debt
Products |
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Fixed
Deposit |
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A
fixed deposit is meant for those investors who
want to deposit a lump sum of money for a fixed
period; say for a minimum period of 15 days to
five years and above, thereby earning a higher
rate of interest in return. Investor gets a lump
sum (principal + interest) at the maturity of
the deposit.
Bank fixed deposits are one of the most common
savings scheme open to an average investor. Fixed
deposits also give a higher rate of interest than
a savings bank account. The facilities vary from
bank to bank. Some of the facilities offered by
banks are overdraft (loan) facility on the amount
deposited, premature withdrawal before maturity
period (which involves a loss of interest) etc.
Bank deposits are fairly safer because banks are
subject to control of the Reserve Bank of India. |
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Features
Bank deposits are fairly safe because banks are
subject to control of the Reserve Bank of India
(RBI) with regard to several policy and operational
parameters. The banks are free to offer varying
interests in fixed deposits of different maturities.
Interest is compounded once a quarter, leading
to a somewhat higher effective rate.
The minimum deposit amount varies with each bank.
It can range from as low as Rs. 100 to an unlimited
amount with some banks. Deposits can be made in
multiples of Rs. 100/-.
Before opening a FD account, try to check the
rates of interest for different banks for different
periods. It is advisable to keep the amount in
five or ten small deposits instead of making one
big deposit. In case of any premature withdrawal
of partial amount, then only one or two deposit
need be prematurely encashed. The loss sustained
in interest will, thus, be less than if one big
deposit were to be encashed. Check deposit receipts
carefully to see that all particulars have been
properly and accurately filled in. The thing to
consider before investing in an FD is the rate
of interest and the inflation rate. A high inflation
rate can simply chip away your real returns.
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Returns
The rate of interest for Bank Fixed Deposits varies
between 4 and 11 per cent, depending on the maturity
period (duration) of the FD and the amount invested.
Interest rate also varies between each bank. A
Bank FD does not provide regular interest income,
but a lump-sum amount on its maturity. Some banks
have facility to pay interest every quarter or
every month, but the interest paid may be at a
discounted rate in case of monthly interest. The
Interest payable on Fixed Deposit can also be
transferred to Savings Bank or Current Account
of the customer. The deposit period can vary from
15, 30 or 45 days to 3, 6 months, 1 year, 1.5
years to 10 years.
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Advantages
Bank deposits are the safest investment after
Post office savings because all bank deposits
are insured under the Deposit Insurance &
Credit Guarantee Scheme of India. It is possible
to get a loans up to75- 90% of the deposit amount
from banks against fixed deposit receipts. The
interest charged will be 2% more than the rate
of interest earned by the deposit. With effect
from A.Y. 1998-99, investment on bank deposits,
along with other specified incomes, is exempt
from income tax up to a limit of Rs.12, 000/-
under Section 80L. Also, from A.Y. 1993-94, bank
deposits are totally exempt from wealth tax. The
1995 Finance Bill Proposals introduced tax deduction
at source (TDS) on fixed deposits on interest
incomes of Rs.5000/- and above per annum.
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Fixed
Maturity Plan |
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Safe,
predictable and better post-tax returns than bank
FDs Rising interest rates not only mean rising
EMIs but also offer an opportunity to earn higher
returns. Debt schemes are now offering attractive
returns with short-term rates in the region of
8-10%. Call money rates have been moving higher
to about 7.5-8% due to tight liquidity conditions.
With the RBI deciding to raise the cash reserve
ratio (CRR), liquidity conditions have worsened.
Tightness in the money markets is expected to
continue till the end of the current financial
year and investors can consider investing in short
term options like FMPs or floating rate schemes.
Fixed maturity plans, or FMPs as they are popularly
called, are close-ended funds with a fixed tenure
and invest in a portfolio of debt products whose
maturity coincides with the maturity of the product.
The primary objective of a FMP is to generate
income while protecting the capital by investing
in a portfolio of debt and money market securities.
The tenure can be of different maturities, ranging
from one month to five years. FMPs can be compared
to fixed deposits of a bank. While a fixed deposit
offers a 'guaranteed' return, returns in FMPs
are only 'indicative'. Typically, the fund house
fixes a 'target amount' for a scheme, which it
ties up informally with borrowers before the scheme
opens. That way it knows the interest rate it
will earn on its investments, providing the 'indicative
return' to investors. |
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Benefits
of FMPs
FMPs offer many benefits like tax efficiency,
fixed tenure and low sensitivity to interest rates.
The minimum investment amount is usually Rs 5,000,
which a retail investor can easily invest.
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Capital
protection: FMPs have less risk of capital loss than
equity funds due to their investment in debt and
money market instruments.
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Low
interest rate sensitivity: As
the securities are held till maturity, FMPs are
not affected by interest rate volatility. The
actual returns are more or less close to the indicative
returns declared at the scheme's launch.
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Lower
cost: FMPs involve minimum expenditure
on fund management, as there is no requirement
for a time-to-time review by fund managers to
buy/sell the instruments constituting the fund.
Since these instruments are held till maturity,
there is a cost saving in respect of buying and
selling of instruments. |
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Tax
benefits: FMPs score over fixed
deposits because of their tax efficiencies both
in the short-term as well in the long-term. |
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