For those who prefer assured returns

Term deposits of banks are important investment instruments for nearly all types of investors. Besides offering assured returns,they are quite liquid in nature....

Term deposits of banks are important investment instruments for nearly all types of investors. Besides offering assured returns,they are quite liquid in nature. If you have put money in a fixed deposit for two years and then need it after just a year,the bank will deduct a small penalty usually one percentage point from the interest rate and return your principal along with the interest amount. Besides,bank deposits up to Rs 1 lakh are insured.

While deciding on the tenure for which to fix the money,give a thought to where interest rates are at present and where they are headed. At present interest rates are at or near the bottom of the current interest-rate cycle. Most economists are of the opinion that the Reserve Bank of India will begin tightening interest rates from January or April 2010. Banks will then follow suit with their own rate hikes. The view among most economists is that interest rates will start heading upward from the second half of 2010. If you plan to put your money into a fixed deposit now,go for a shorter tenure,of around one year. A year later,when your

money is due for reinvestment,you will be able to get a higher rate.

A number of web sites offer interest-rate comparison tools see table for links. Enter the amount and the tenure,and then choose the best interest-rate option. However,as Pune-based financial planner Veer Sardesai warns,Dont look for a bank based solely on interest rates. While co-operative banks usually offer the highest rates,the risk is also greater. After the international financial crisis many perceive government-owned banks to be the safest.

Most banks pay a slightly higher rate to senior citizens which the latter should take advantage of.

As for their disadvantages,the interest income from a fixed deposit gets added to your total income and is taxed at the marginal tax rate. For people in the higher tax brackets,it is not very tax friendly.

Useful tips

Kartik Varma and Dhruv Agarwala,co-founders of iTrust,a Gurgaon-based financial advisory firm,offer suggestions to investors planning to put their money in fixed deposits.

Story continues below this ad

One,while choosing the bank check out the prepayment penalty clause. Opt for a bank that offers lenient terms.

Two,while comparing interest rates of two banks,compare the compounding frequency. If two banks offer the same rate,say 7 per cent,but one compounds annually while the other compounds quarterly,then the latter will have a higher effective yield.

Three,if you earn an interest amount of more than Rs 10,000 from a single bank branch,you will be subject to TDS. Split your deposits among several branches to avoid this. And finally,while filling up the form,do appoint a nominee. u