How to align investments in fixed deposits with your financial goals

Bank fixed deposits are one of the most sought after instruments for many to park their surplus, especially those who are risk averse.

It has various characteristics – including its high safety factor - that make people to choose it over other instruments despite low returns on the money invested. At present, bigger banks offer 7 per cent on less on deposits of various tenures while some small finance banks offer slightly higher returns than their established counterparts.

What are the factors that should prompt one to choose bank fixed deposits to park their surplus and which financial goals can be met through the money invested?

“Fixed deposit is an ideal investment option for an investor who is looking at fixed and assured regular income. The percentage of your financial portfolio that you should invest in FDs should ultimately depends on your risk appetite and your liquidity requirements. However, they should definitely be a part of one’s portfolio and the allocation to debt instruments should increase with age,” say Adhil Shetty, CEO, Bankbazaar.

FDs are some of safest instruments and are classified and segregated based on overall safety of the initial capital invested. “Usually, FDs issued by banks, large private companies and PSUs have AAA rating, meaning there is little likelihood that your investment will do badly. On the flip side, this means that the returns will also not be very high compared to say a mutual fund investment,” he said.

Shetty feels FDs are good for short-term investment horizon, typically not more than 3 years, as they are a risk-free option. “You should not be taking risks on critical goals that you can neither delay nor downsize. The idea mainly is to save and invest in a way that there is little or no fluctuation in returns and absolutely no loss of capital. This is because in a short-term investment, you have very little time to recover any of capital that happens (if a risky investment is made). This makes FDs one of the best options for critical short term goals such as making a down-payment, college fees, etc,” he said.

Nirmal Rewaria CEO & Co-founder, My Finpeace also advises not to link any long-term goals with the money that FDs will generate. “No long term goal can be attached to FD. But all short term goals below one year period can be attached to a FD as someone should not take risk for short term and FDs are the best instrument for short term,” he said.

Rewaria feels the FDs could be a good instrument to park the emergency fund corpus. “Every household needs to develop a contingency fund which would take care of emergencies and so that in such situations invested funds don’t get disturbed. This emergency fund should be kept in bank FD which should be available on demand immediately. Beyond that if someone keep extra portion in Bank FD then it is wastage of money,” he felt.

For a senior citizen, however, fixed deposits make a lot of sense, says Anil Rego, Founder and CEO, Right Horizons. “Many senior citizens and risk-averse investors prefer the safety of investment above other things. Bank FDs are best-suited for such conservative investment attitude,” he said.