Saturday 10 August 2019

HOW TO KNOW THE BEST TIME TO INVEST IN FIXED DEPOSIT AND MAXIMIZE INTEREST

Timely investments in fixed deposits are an efficient way of boosting your savings. Unlike a regular savings account, a fixed deposit secures your money and helps you earn higher returns.

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You can start a fixed deposit with your bank. But to ensure that you make the most of this investment option, it is important to determine the right time to invest. Here is what you need to keep in mind before you go ahead with your investment.

Consider your current income
Before you decide on the amount you want to invest, it is crucial to assess your current income. If most of your income is being used to pay off bills, you will first need to accumulate the funds you wish to invest. Instead of immediately deducting the amount from your current income, plan ahead and keep aside a part of your income every month, until you have accumulated your desired amount.

Be aware of taxable income
The interest earned on a fixed deposit is not tax-free and when received, it is adjusted for tax. Tax is applied to annual interest earned. It is thus important to be aware of the taxation policies before investing.

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Do your research
It is always wise to do your own research before you go ahead and invest. Keep an eye on interest rates which will help you understand when they are high and low. You can thus avoid investing at a lower rate of interest. When the rates are high, invest heavier amounts for a longer period of time. Also bear in mind that some banks offer better interest rates than other banks.

Make the most of laddering
Interest rates are subject to frequent changing. Wondering if your investment will be stuck at a lower rate of interest can make you apprehensive about investing. Laddering is the ideal solution to such a situation. By investing your savings in the FDs of different tenors, you prevent a large amount of your savings from being trapped for a longer tenor with a lower rate of interest.

By laddering, you can reinvest your short-term investments when the interest rate rises. This method also allows you to enjoy flexibility in case you need to liquidate your FD for an emergency. By liquidating only the amount that you need, the bulk of your investment stays safe and you can continue to earn interest.

So, before you decide to invest your savings, make sure that you are well aware about factors like interest rates and taxation policies, so that you can invest wisely and get the most out of your fixed deposit.

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There is a theory that states that the longer the tenure of parking the money, the higher the return or compensation would be. To choose an optimum time frame for a term deposit, it is essential to understand the interest rate cycle. With a term deposit, interest rate is fixed for a designated term. From day one, when you open an account, till the end of the term, the investment will earn interest at exactly the same rate.

Term deposits are safe investments because the interest rate that one has signed for guarantees the quantum of return. Returns are not dependent on the share market or on what the bank decides on short-term rates.

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The investor knows the interest rate is guaranteed and this makes a term deposit a safe and secure investment. Deciding the best time to put money in a term deposit depends on several factors, such as how long an investor can keep the money in the account or how quickly he might need to access funds. For example, the highest interest rates are usually offered on the longest terms where one has invested a large amount and chosen to have returns paid at maturity.

However, this does not mean the best term is the longest one offered, nor should one simply invest all one’s savings in a 12-month term deposit. Instead, one could choose to channel the savings into different tenures, depending on one’s need to utilise the cash in the future, since premature withdrawals have penalties that would ultimately reduce the returns on the principal.

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Keep a watchful eye on interest rates. Investors don’t need to know the intricate details of all the market forces that influence the rise and fall of interest rates. However, they should know where the current cash rate stands, where it is predicted to go in the near and long-term future and where on the interest rate cycle we are right now.

Look into past rates to see if rates are rising, falling or staying the same. As per the current market/interest rate scenario, one should go for fixed deposits instead of fixed maturity plans of mutual funds since the FD tenures extend for longer time horizons, even beyond five years in certain instances. The FMPs, on the other hand, have tenures of 36 months or lower.

Understand interest rates rise and fall in cycles. Interest rates will go up or down and investors will notice the effects of this cyclic movement when they become involved in long-term investments. Therefore, if you are looking at investing for a long term, two years or more, avoid doing so when interest rates are at their low point. When interest rates rise again, the investment will be locked in at the lower rate.

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Don’t automatically reinvest in the same account at maturity. Some term deposit accounts allow investors to automatically roll over the investment amount into a new term deposit. It is convenient, but in the time that the investor’s money has been sitting in the account, interest rates could have risen. Enrolling in the same account, earning the same interest rate may not be the best investment.

Don’t hesitate to break that FD if the rates have moved up or your old FD is earning lower. Since the current rates have peaked and would now start moving downwards, any older FDs that have been done at lower interest rates should be liquidated and the proceeds invested in a fresh FD for a longer tenure (if the funds are not required in the near future). It is typically beneficial despite the premature withdrawal penalty that is imposed for early liquidation since the funds would earn a higher return in the future when the market interest rates could be lower. (Punch)

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