Fixed deposit offers safe investment avenue

Fixed deposit offers safe investment avenue

People like their money to grow. They may want to do this for meeting their needs in future, for countering the inflation, for effecting savings and for many other purposes. For meeting their objectives, they invest money in different avenues, be it the real estate, shares, bonds, insurance policies and other financial products. These avenues carry different levels of risks and returns. The more the risks associated with it, the more are the returns as well. Some people would like to play the big risk investment game, some others would prefer a safer investment avenue. Fixed Deposit instruments carrying stable and fixed interest rates guarantee a specific sum of money to be paid to the investor periodically.

Fixed Deposits assure fixed, guaranteed returns. For this reason, these form an important part of portfolio management as well. The financial managers divide the investments of their clients into safe, less risky and more risky ones. Ideally, the planners first guarantee the assured returns to their clients, sufficient to meet the running and other important expenses. Thereafter the sums can be invested in more paying instruments. For the investors, the fixed deposit is a way to keep aside a part of their surplus funds. Since the interest rates on these are usually low (but higher than that of the regular savings account), the primary consideration for investing in these is maintaining the security of the future and not the generation of money.

The most characteristic feature of the fixed deposit is that the sums have to keep invested for a specified time period, usually five years. Ideally, these are not allowed to be withdrawn but, in case you require the funds due to some emergency, the deposit can be used as a collateral security to take a loan.

Despite their secure nature, the money invested in them might not be earning the return to the extent as it appears on the face value. If there is a high inflation rate, then the fixed interest rates might add up to nothing as compared to inflation rates. Then, there is another disadvantage of the interest income not being tax free. The day you receive the total sum in your account, your tax liability arises. Therefore, in times of higher inflation, the people prefer to invest in the floating rate instruments since there is an expectation that the central bank will revise its rates upwardly.

The interest rates are primarily determined by the central banks of the countries. The other rates of different financial institutions and products are determined by interest rate policy governing the whole of interest rate structure of the economy. The factors which chiefly affect these rates are: the extent of inflation in the country, the period for which the Fixed Deposit is sought to be done and the other avenues of investment available to the investor. These are a vital part of the monetary policy and play a crucial role in the driving the deposits and lending of the banks and financial institutions.

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