The Life Savers Called Online FDs

wealthymattersThe one good think about fixed deposits is the absolute predictability of returns, as long as they are not closed prematurely. Add to this that unlike a lot of other fixed income instruments, fixed deposits are available for all tenures upto 10 years, and you can now use fixed deposits to design your own financial products.

The only drawback is the extremely low deposit insurance  in India.The Deposit Insurance and Credit Guarantee Corporation provides insurance to each customer of a Scheduled Bank for deposits up to Rs 1 lakh in case of  bank failure. This limit is applicable across all the deposits, including savings, current, fixed and recurring. This limit remains Rs 1 lakh even if the sum of all deposits (including accrued interest) exceeds the same. Worse, non-scheduled banks ,companies and other institutions offering fixed deposits don’t provide this small comfort either. Of of what use is predictability of returns if basic security and return of capital is not guaranteed ? Read more of this post


Investing Like An Indian Politician

wealthymattersThe one thing career politicians in India know is that income often comes in fits and starts and there is a need to provide for necessities and expenses in the meantime.

Here’s what a lot of them will do.

1.FDs in the name of every family member not qualifying to fall in the tax-net. That way some regular income for necessary expenses is always generated.

2.Land: Invest in land in appreciating location.Agricultural land purchased on any national highway at distance of 15 to 25 kms from the city centre of big cities have tended to double in 2-3 years and so make excellent main appreciating assets .Take up agriculture yourself or let out the land to other farmers for rent .So your income will be tax free and the underlying asset will appreciate as well. Regularly sell land on appreciation and move away further to grow capital. Urban land too works but community activities on it are not tax free. Read more of this post


wealthymatters.comNormally,for fixed income instruments , the interest rates corresponding to longer terms are higher than those for shorter terms.However,locking in money for longer periods is not always an option.One way of ensuring a greater degree of liquidity while taking advantage of the higher rates offered for the longer tenures is laddering.

If you want to create a 5 year ladder you could buy a 1year, 2year, 3year,4year and 5year instrument .Then after the first year,renew the matured 1 year instrument for a term of 5 years.Then the following year do the same with the matured 2year instrument.Continue the process.

Laddering ensures that at least some of the higher interest rates are locked in and that the average rate is higher than the rates at the lowest point in the interest rate cycle.

If you are drawing an income from your fixed income instruments say to pay or part pay you a pension,your EMIs,a tution fee or get some passive income,laddering smoothes out the variations.

Laddering is possible with bonds,NCDs,FDs,CDs etc.

Breaking a Fixed Deposit

Breaking a FD means pre-mature withdrawal of your money locked in a FD i.e. taking out the money before the term of the FD is over.When you break a FD, banks don’t give you the rate of interest at which you booked the FD ; instead you get the rate applicable for the duration for which you actually kept the money with the bank.For example if you made a FD for 4 years, at an interest rate of 8% and now you wish to break it after 2 years ,you would get the rate applicable to a 2 year FD prevailing at the time when you had booked your FD, and not the 8% which is noted in your FD certificate.So, if the rate for a 2 years FD was 7.25% when you had booked your 4 year FD, you would only get an interest of 7.25% per annum for the 2 years you would have actually kept the money with the bank.In addition there is often a penalty to be paid,comm0nly a further 1% deduction.Some banks do waive off this penalty if the liquidation or premature withdrawal of the FD is due to some emergency. But the word “emergency” is not well defined and this waiver is given on a case-to-case basis.Some banks also waive off the penalty if you reinvest the withdrawn amount with the bank. Some banks provide this waive off only if the new FD is kept for a period higher than the remaining period of the original FD.So there is some leeway to negotiate to avoid paying a penalty while attempting to break a fixed deposit. Read more of this post

Tax – Saving Fixed Deposits

In Budget 2006, the government extended tax benefits under section 80C of Income Tax Act, 1961 to five-year tax-saver deposits. As per this provision, a tax-payer is eligible for exemption on five-year deposits on investments up to Rs 1 lakh. These fixed deposits are locked in for a five-year period . There is no option of premature withdrawal. Also, you cannot pledge this type of term deposit as collateral to secure a loan to meet liquidity needs. Similarly, banks do not offer overdraft facility on tax-saver deposits.Unlike the plain vanilla fixed-deposit products, these tax-saver FDs do not have the sweep-in facility. This means a person cannot link fixed deposit to their savings account so that the surplus funds in the savings account can be automatically invested in this fixed deposit.In addition, there is no overdraft facility available on the tax-saver FD. As this instrument of saving money is special due to its tax-saving status, banks do not extend relationship benefits on the tax-saver FD. Read more of this post

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