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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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