Once you decide to start saving money, what is your first stop? For most Indians, it is deposit products, thanks to their convenience and guaranteed returns. Many first-time investors who are not familiar with different types of financial products, such as mutual funds, also prefer these as an initial step.
Very senior citizens (whose need for funds are very near term), and those who are absolutely risk-averse also prefer deposit products. While these do not score high on real returns, there are investors who prefer deposit products. Here's a look at some of them.
Savings account deposits
This is the most basic type of deposit if you have a bank account. The current interest rate is 3.5-7% per annum, depending on the bank and the amount invested.
This deposit also comes with clauses such as minimum balance requirement. A savings deposit account can be used to receive money and for the amount that you need for regular expenses, including loan instalments.
Bank fixed deposit investments
Your money earns a higher interest in bank fixed deposits than it does in a savings account. The drawback of this deposit is that with it you have less flexibility than in a savings account. Plus, it comes with a pre-defined maturity date.
While investing in these, know that, usually, the lower the tenure of the deposit, the lower will be the interest rate.
The rates of interest also depend on liquidity and cost of fund requirements of the bank. The current interest rates on bank fixed deposits range between 3.5% and 7.5%, depending on the tenure. The tenure can vary between 7 days and 10 years. One good thing about these is that senior citizens get higher interest rates. Some of these offer tax benefit. Banks also offer variants of fixed deposits such as sweep-in facility where after a certain limit in your savings account, the money automatically moves to a fixed deposit. Bank fixed deposits work for people in the lowest tax bracket; those who are risk averse; and those who want guaranteed returns.
Recurring deposit
This product allows you to deposit money on a recurring basis. Most banks offer this product. It usually works for people who don't have a lump sum amount to invest at one go but can deposit on a monthly basis. The interest rates currently range between 5.50% and 7.50%. It comes with a maturity period (6 months to 10 years). Like fixed deposits, if you withdraw your money from a recurring deposit before maturity, a penalty will apply or you may have to let go of the interest. In case there is a delay in paying the instalment, you will have to pay a penalty. This product works for those who are in the lowest tax bracket or first-time savers who want to inculcate the habit of saving regularly.
Corporate fixed deposits
As part of the process of raising money, companies also issue fixed deposits. Usually, the interest rate on these is 100-200 basis points higher than bank fixed deposits; but they are also riskier. Currently, the interest rate on some of these is as high as 9.50%. Tenure is similar to that of bank fixed deposits. These deposits come with credit ratings—the higher the rating, the lesser the chances of default. Before investing here, do your due diligence on the company's fundamentals; there have been cases of default and even fraud.
Products from Post offices: India post
India Post also offers multiple deposit products. The interest rate on savings deposit is currently 4% per annum, and minimum amount for opening one is Rs20. The recurring deposit in post office offers 7.1% per annum, which is compounded quarterly, and comes with a 5-year lock-in. The time deposit offers 6.8-7.6% for tenures of 1-5 years.
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