In India, there are plenty of options for investment. Be it high-risk high-return investment options like the stock market or mutual funds, or safe investment instruments like Public Provident Fund, Senior Citizens’ Saving Scheme, Post Office Monthly Interest Scheme, or Pradhan Mantri Vaya Vandana Yojana, there are many options for parking your hard-earned capital for appreciation.
Despite the availability of a wide range of investment options, fixed deposits still call the shots in terms of investor interest. To cater to the rising popularity of fixed deposits in India, many housing finance companies and non-banking financial companies have entered the market. And, at present, corporate FDs are some of the most popular investment instruments in India. Corporate fixed deposits, such as from PNB Housing, offer higher interest rates, better terms, and convenient account opening, and has been gradually garnering more attention than conventional bank deposits.
Read this article to know the top-4 factors that affect fixed deposit interest rates.
- Fixed Deposit Tenure and Interest Type
The tenure plays a significant role in determining fixed deposit interest rates. Generally, FD terms range between one year and ten years. If you choose a term of one year, the interest rate will be the lowest. Conversely, if you select an FD term of ten years, you can expect the highest rates.
Fixed deposit rates also depend on the interest type. If you choose to invest in a cumulative FD for one year, the effective interest rate will be considerably higher than the non-cumulative FD’s monthly interest mode.
Another factor that determines the effective rate of return is the ‘Yield-to-Maturity’, or the actual rate of interest you earn from your investment. If you invest in a cumulative FD, the yield to maturity can go up to 9.13% for an FD of ten years’ term. However, in the case of a one-year FD, the yield to maturity remains the same as the interest rate.
Hence, before investing in a fixed deposit, try to look at the yield to maturity and select the right term for maximising the returns.
- The Investment Amount and Age
The investment amount and age play major roles in determining fixed deposit interest rates.
The minimum amount you need to invest in a corporate FD, such as from PNB Housing Finance, is INR 10,000 for a cumulative fixed deposit. In a cumulative fixed deposit, the financial institution calculates the interest annually and credits it to your account. The interest is calculated on the principal and the interest credited in the previous year and is again credited to your account next year. The accumulated interest and the principal is credited to your account at the end of the FD term. However, for the monthly interest payout option, the minimum investment amount is usually INR 25,000.
Age is another factor that decides fixed deposit interest rates. Many financial institutions offer a 0.25% higher interest rate than the prevailing interest rate for senior citizens.
Hence, the investment amount and age decide the returns you will get from your investment.
- The Reputation of the Lender
Broadly, four types of financial institutions offer fixed deposits – scheduled commercial banks, small finance banks, non-banking financial companies, and housing finance companies.
Scheduled commercial banks generally offer the lowest fixed deposit rates, followed by small finance banks and non-banking financial companies. However, you can often get the highest fixed deposit rates from housing finance companies like PNB Housing Finance, as their operating costs are much lesser than conventional banks.
The reputation of the lender also plays a crucial role in fixed deposit rates. PNB Housing, for example, has been in the business for over three decades and has a huge customer base. Additionally, they offer CRISIL FAA+ and CARE AA rated FDs, considered the industry’s safest. Hence, they can offer much higher interest rates without much impact on their bottom line.
- Miscellaneous Factors
Besides tenure, interest type, investment amount, investor’s age, and reputation of the lender, some other factors that impact fixed deposit interest rates are auto-renewal, premature withdrawals, and the TDS-exemption limit.
If you choose auto-renewal, your fixed deposit gets automatically reinvested when the term ends. Hence, you do not miss out on the interest income.
Although you can close the FD account any time you need money, the financial institution levies a penalty on premature withdrawals. The penalty can reduce the effective rate of interest.
Generally, housing finance FDs offer TDS-exemption for an interest income of up to INR 5,000 every financial year. If the TDS-exemption limit is any lesser, your effective income from the fixed deposit comes down.
Conclusion
Other than the factors mentioned so far, some other factors, like the economy, inflation rates, etc., also impact fixed deposit rates. If you want to get the best interest rates, consider choosing a reputed lender offering a high yield to maturity.
