FDs appeal to people because they provide a sense of security, assured returns, and convenience of investment. However, it is necessary to weigh the benefits and other factors involved with retirement before investing in FDs, particularly for senior citizens. Retirement corpus is the key source that ensures the flow of additional income after retirement. So, it’s important to carefully go through all the aspects before investing their retirement corpus. So, here’re some important aspects that can help you know if FD is the right investment option for your retirement fund.
Ease Of Investment
FDs require an effortless investment process, which makes them a desirable choice, particularly for senior people. Opening an FD account is often quick and easy, needing little documentation, with the majority of banks and financial institutions providing both online and offline alternatives for FD investment. Some banks even offer to open FD accounts without the need to have a savings account in their bank.
FDs offer a fixed rate of return for the opted maturity tenure. For retirees who value stability and a predictable income source, this fixed return may be enticing. However, FD returns cannot always keep pace with inflation, which may fall short of your required real rate of return over time.
Some banks also offer floating rate FDs, but investing in them makes sense when the interest rate trend is upward. Also, senior citizens may find floating rate FDs more complicated and riskier as they don’t offer a guaranteed return like a fixed rate FD product.
FDs are seen as being generally secure investments as they are subject to stringent RBI regulation and partially supported by an insurance cover. It is important to note here that deposits up to Rs 5 Lac in a bank are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). FDs can be a good choice if the safety of capital is a top concern.
However, you must choose a bank that is highly credible and has an impeccable track record, especially when you want to invest more than Rs 5 Lac in FD.
If you are looking for a higher interest from FD with a lesser-known bank, you should diversify your investment into multiple banks while restricting the maximum deposit amount to Rs 5 Lac in such banks.
You may avail loan against your FDs at a cheaper rate than most of the other loan products. Banks usually charge 1% to 2% above the interest rate applicable to the underlying FD. You can avail a loan amount of up to 90% of the FD amount. Loans against FDs are usually extended as an overdraft facility, so you get higher repayment flexibility without any prepayment penalty compared to other loan products.
Flexibility Of Interest Payout
Before you start investing, you may select from a variety of interest payout options. Various interest payout options available on FDs are- monthly, quarterly, half-yearly, annually, or at the end of the maturity period. Depending on your requirements, you can decide on the frequency of interest payout. FDs can assist you in creating a reliable alternate income stream, as the majority of people do not have a continuous income source after retirement.
According to section 80 TTD of the Income Tax Act, interest income earned by senior citizens up to Rs.50000 from investments in instruments such as bank FDs, post savings schemes, etc., are eligible for a tax exemption. However, interest exceeding Rs.50000 is subject to tax according to the individual’s applicable slab rate.
Before deciding whether or not FDs are appropriate instruments for your retirement corpus, it is critical to evaluate your financial goals and return expectations. It’s always better to diversify the retirement corpus investment into different asset classes to lower the risk while keeping your different financial goals in mind.
The author is an Independent Financial Journalist.