Term deposits are the simplest and the commonly preferred means to invest. These are considered to be a more secure option in comparison to investing in stocks. 2 types of term deposits exist: One is a fixed deposit and the other is of the recurring type.
Fixed deposits are wherein you deposit the entire investment amount as a lump sum. However, in the case of recurring deposits, the investment amount will be deposited in installments. The process of investing in the FD is very simple and it is considered to be extremely secure.
But it is worth noting that besides banks, companies also offer a fixed deposit. The returns that you receive from a bank fixed deposit is lesser than what you get from company fixed deposits. Apart from this, there are other factors that are to be taken into consideration when you are looking for investing your hard-earned money is fixed deposits.
Here are some of the other things you must consider before you choose between bank fixed deposits and company fixed deposits:
Security of Investment:
If you invest in company fixed deposit, the company must complete its own financial goals in order to give you returns. The non-completion of the same can put your investment at a risk. But bank fixed deposits, on the other hand, can be considerably safer. These also come with an insurance cover of around 1 Lakh, provided by the DICGC. Additionally, if the bank is owned by the government, you can be certain about the FD investment being safe.
Returns Being Offered
Banks and companies will both offer investments that have a long tenor with a fixed interest rate. Now, in the case of companies, as the risk is higher, the interest rate being offered is also higher. For banks, longer the term, higher the interest rate offered.
But overall the returns offered by a company fixed deposit can be more. Moreover, a company’s health is judged on the basis of its credit rating. If this is lower, then it may offer higher rate of interest on in its FDs as a means to attract investors.
Both these investments remain taxable. For returns less than Rs.10,000, the same have to be declared as ‘income from other sources’ while filing the tax returns. In the case of bank FDs, if the amount exceeds Rs. 10,000 and for corporate FDs if it exceeds Rs.5, 000 the in this case the tax deduction is done at the source.
However, you do have the option of investing in bank’s tax-saving FD. Note that these have a fixed investment period of 5 years.
For company and bank FDs, it is possible to make a withdrawal before completion of tenure. But in the case of bank FDs, there are lesser penalties involved – This can be around 1%. But for corporate FDs, this can be up to 2-3%. It may also happen that only the principal investment amount is returned.
Thus, numerous factors affect your choice between a bank and a company FD. It is necessary that you take all these options into account because such an investment can have a significant impact on your savings. Moreover, you should be certain about your financial plan and accordingly make the investment.