Common Mistakes to Avoid While Investing in FDs

Investing in FD is an excellent choice for investors seeking guaranteed earnings while maintaining the highest level of security. You just deposit a bulk amount of money and then see it grow over the specified period and at the specified interest rate. Because of the high-interest rates and stability, your money grows at minimal risk. However, certain quick judgments may jeopardise your ability to make the most money. You can end up making mistakes that cost you the chance to maximise your FD interest revenue. 

What Do You Mean by Fixed Deposit?

Investing in FD is one of the safest types of investments since they generate constant returns. Because of the low risk of the investment, a large number of people in the country choose to invest in fixed deposits rather than shares. Furthermore, some fixed deposits may assist you in reducing your tax liability under Section 80C of the Income Tax Act of 1961. Fixed deposits give you control over your money and enable you to see it increase over time. Investing in FD is a popular investment option, but there are a few common traps to avoid when investing in them. Here are six typical errors to avoid to earn more and earn more securely from your fixed deposit.

How Does Fixed Deposit Work? 

We’ve simplified it for you to help you understand what a fixed deposit is:

• A fixed deposit is a financial product provided by banks and NBFCs that allows you to deposit a large amount of money and earn a greater rate of interest than a savings account.
• An FD may be issued for a period of 7 days to 10 years. When you deposit with your bank, it begins generating interest based on the length of the deposit. The basic rule of a fixed deposit is that funds shouldn’t be withdrawn before maturity. If you withdraw before the maturity date, you must pay the penalty.
• You may choose the time duration for your investing in FD. In other words, you may keep it open for as long as you have available cash.
• Some banks provide a premature withdrawal option, although this results in a reduced interest rate.
• The bank credits the main amount and interest to the account holder’s bank account on the maturity date.

Fixed Deposit Types

Before you put aside money for investing in FD, you should be aware of the various kinds of fixed deposits available on the market. Read on to learn more:

• Typical Fixed Deposit

A simple fixed deposit involves depositing money over a specific period at a fixed interest rate. The periods of a typical fixed deposit range from one week to ten years. It is the most popular FD choice among investors.

• Fixed Deposit Special

Special fixed deposits are called so since they are only available for a limited time. A particular period might range from 290 to 390 days. Special FDs have a higher interest rate and are popular with a variety of stakeholders.

• Fixed Deposit with Tax Savings

Tax-saving fixed deposits, unlike standard fixed deposits, cannot be booked for less than 5 years. The cash invested is tax-free under section 80C of the Income Tax Act of 1961, but the interest earned on the FD is taxable.

• Variable Fixed Deposit

A floating fixed deposit’s interest rate fluctuates quarterly or annually, allowing consumers to profit from fluctuating interest rates.

The Reserve Bank of India’s rules govern changes in interest rates.

Most Common Mistakes to Avoid While Investing in FDs

Here is a list of common mutual fund mistakes that new investors make.

• A lack of financial goals

Financial goals are vital once you start planning your investments. Investing gets easier when you have a clear goal in mind. Because the money will be locked in for a certain period, you should have clear and realistic goals in mind before investing in FD.

• Not comparing interest rates

When you decide to create a fixed deposit, start comparing interest rates from several organisations. Banks are increasingly offering enticing interest rates to entice customers. Interest rates vary per bank, so seek the one that gives the highest interest rate on a fixed deposit.

• Choosing an inappropriate lock-in period

The amount invested in a fixed deposit is set for a certain period. As a consequence, you must proceed with prudence and invest only when you are convinced that you will not need it shortly. The periods of fixed deposits range from 7 days to 10 years. As a consequence, you should only invest in FD after carefully considering your current and future requirements. Examine the tenures as well.

• Making a hurried exit

If you withdraw from the fixed deposit before it matures, you will be assessed a penalty. For partial or early withdrawals, most banks levy a 1% penalty on the applicable rate. Clients may break the fixed deposit without penalty with certain banks; however, they should reinvest the money in a new fixed deposit with the same bank for a longer duration.

• Failure to meet liquidity requirements

It should be noted that investing in FD is a safe way to invest; your money is locked in for a certain amount of time. As a consequence, you should make sure you have enough cash on hand in case of an emergency.

Conclusion

Keep these points in mind to avoid making the same mistakes that others have made. Avoiding these mistakes will allow you to earn greater benefits and earnings from your fixed deposit investments.

You may also get in touch with the experts to learn more about your investing options and locate the best-fit term deposit plan for your financial needs. The experts will help you in learning about the different advantages and benefits of your selected fixed deposit plan, which will allow you to make the best financial possible choice.

Before investing in FD, keep the previous concepts in mind to get the most out of what they have to offer! To know more about such types of topics, visit Piramal Finance.