How to go about with investment in Fixed Deposits

Today with sensex going down , investors are looking in to debt investment. to invest in debt related areas, investors can invest in FD in Banks, FD in NBFCs ,Company Deposits or  FMP. Please understand that income tax is not deducted at source on deposits up to Rs 5,000 and income tax shall be deducted for interest income more than Rs 5,000 in a financial year.

CRISIL rates the different agencies that accepts Deposits and the rating can be found at credit rating section. Please also understand that CRISIL rating is not guarantee, but an indication of credit worthiness of the agency.

FMPs : Please look at today’s Hindu BusinessLine article "Dealing with the FMP scare" or look for an earlier article from Shyam "Know your Fixed Maturity Plan". The main essence is that the returns on FMP is based on the markets conditions and there is no assured returns

FD in Banks:  safest. offer less return compared to NBFC FDs or Company FDs. However Deposits in banks come with a safety cushion. Deposit Insurance and Credit Guarantee Corporation (DICGC), provides deposit insurance and credit guarantee to depositors, covers all banks in India including foreign banks. All your deposits such as savings, fixed(principal and interest), current and recurring are insured. The deposits up to Rs 1 lakh are protected to save the interest of small depositors. some tips here are

  • The insurance ceiling applies separately to the different banks in which a person may have deposits. So, split deposits among various banks so that the insurance limit of Rs 1 lakh is not breached in any bank.
  • The insurance cap also applies separately to each holder of a joint account and to accounts held in the names of different members of a family. if A is account holder 1 and B is account holder 2 for FD 1 and if A is account holder 2 and B is account holder 1 for FD2, both the deposits are covered

FD in NBFCs
Their interest rates are competitive, but even higher at times than those of banks. Public deposits are unsecured and DICGC does not have deposit insurance facility for NBFC depositors. The Reserve Bank of India (RBI) does not give any guarantee for the financial soundness of NBFCs and would neither help to obtain the payments due on public deposits.

Company deposits
They give higher interest rates than banks and NBFCs.  These deposits have a higher risk of default. As they are unsecured, it is difficult recover capital if the company defaults.Spread your deposits across a large number of players and do not invest in companies with a credit rating below ‘A’.