Why Millennials Should Not Think That FDs Are Outdated

Time to read: 6 mins | August 21st, 2018

“Millennial”, according to Merriam Webster dictionary, refers to a person born in 1980s and 1990s. Some even include children born in early 2000s.

Fast, furious, ambitious, adventurous, willing to experiment, motivated, opinionated, confident, and smart are some of the characteristics of a millennial in this e-age.

The good thing about millennials, in general, is they value money and aspire to create wealth. And as they do with food, many are willing to experiment when it comes to investing hard-earned money –– trying new investment avenues.

But isn’t striking a balance between the old and new better?

So, not considering the age-old investment avenues may prove to be foolish. Take the case of bank fixed deposits: Some millennials believe that bank fixed deposits (FDs) are passé. But that’s not the case.

Here are eight great reasons to invest in bank FDs:

• The returns earned are fixed; there is no risk as in the case of market-linked instruments
• FDs earn a higher rate of interest than parking money in a saving account
• Effectively, the returns earned on bank FD can counter inflation with the power of compounding, particular in a rising interest rate scenario
• A bank FD can also take care of liquidity needs and address short-term goals, provided the tenure is thoughtfully selected
• A bank FD can be used as collateral when you don’t have a credit history and want to take a loan
• To get an Insta Easy Credit Card over-the-counter with minimal documentation and guaranteed approval, a bank FD helps
• Even tax planning is possible with a Tax Saver bank FD, where a tax benefit of upto Rs 1.50 lakh is available under Section 80C of the Income-tax Act, 1961
• Saving and wealth creation if facilitated with a bank FD

If you are millennial who is averse to taking risk, want safe and secured returns that provide a sense of financial security, a bank FD is one of the appropriate investment avenues.

Likewise, to park money to build a rainy day fund (also known as contingency fund), a bank FD is apt or you may simply take a loan against your existing bank FD (in the form of an overdraft).

[Read here: All You Need To Know About Loan Against Bank Fixed Deposit ]However, when you book a bank FD, do keep in mind the following points:

• Judge the financial health of the issuer – This is of utmost importance for the safety of your capital. Thus, understand who are the promoters, their credibility, the investment grade of bank to recognise its financial strength –– even though bank FDs, unlike corporate FDs, are not dependent of ratings and are regulated by the Reserve Bank of India (RBI).
  
• Know the rate of interest offered – Be wary of banks that offer an extraordinarily high rate of interest. Keep in mind that with a higher rate of return comes high risk. Therefore, do not get lured by an extraordinarily higher rate than the market rate, or else you would risk your capital.
• Select your tenure or maturity period thoughtfully – Tenure or maturity period refers to time frame for which you want to park your hard-earned money in bank FD.
  Also, do note that certain bank FDs, such as the tax saver bank FD, have a lock-in period.
  When you invest, assess when you would need your money –––the investment horizon––– for certain financial goals you may have in mind. This way you’ll select the bank FD tenure carefully and not park more money in saving bank yielding a lower rate of interest.
• Select your investment plan/option wisely – When you invest in bank FDs, you have plans/options such as quarterly compounding (i.e. reinvestment of interest option), quarterly pay-out of interest, and monthly payout. Choose wisely between these, depending on cash-flow requirements.
  If you would like to draw a regular source of income, consider between monthly or quarterly interest pay-outs directly your bank account.
  On the other hand, if your planning for a short-term goal (say 18 months away), reinvestment of interest instead of regular pay-outs, would be better suited.
• Know the tax implications – Do not live under the myth that interest earned from bank FD is not taxable. The fact is: the interest earned on bank FD is taxable under the Income Tax Act, 1961. As per the prevailing rules, tax is deducted at source by the bank.
  The rate for Tax Deduction at Source is 10% if PAN is furnished, and if not, then 20%. No surcharge or cess is levied over and above this basic rate.
  TDS with respect to interest earned on your bank FD, is deducted on the basis of the total interest projected on the aggregate of your bank FD for the financial year. This is in accordance to Section 194A of the Income Tax Act, 1961.

If the total projected interest in a financial year crosses the threshold limit, which is currently Rs 10,000 for non-senior citizens, TDS is deducted proportionately from the existing fixed deposits at the time of interest application.

Also, do not be under the impression that once tax is deducted at source, there is no need to pay tax when you file your Income Tax Returns. The fact is, interest is chargeable under “Income from Other Sources” in the computation of total income and taxed as per each one’s tax slab.

Likewise, when you invest in a tax saver bank FD, interest earned thereon is taxable as per your tax slab. It is only when you invest in tax saver bank FD, you are entitled to deduction of upto Rs 1.5 lakh under Section 80C of the Income Tax Act, 1961. If the tax saver FD is held in joint name, this deduction will be available only to the first holder possessing a valid PAN (Permanent Account Number).

At Axis Bank besides the regular bank FD and Tax Saver Bank FD, there are variants with distinguishing features, they are:

- Encash 24 Flexi Deposit:

Encash 24 Flexi Deposits can be linked to your Axis Bank savings account facilitating automatic transfers in multiples of Rs 5,000 to a fixed deposit when the balance in the savings account crosses Rs 25,000.

And the money in fixed deposit can be accessed easily via a cheque or ATM withdrawals. This amount is automatically reverse-swept from the most recently formed FD (in units of Rs 5,000) to your savings account whenever the balance in the latter (i.e. savings account) falls below Rs 25,000.

Thus, it offers dual benefits:

- Takes care of liquidity needs; and
- Earns a high rate of interest via bank FD

However, it is important to note that the units withdrawn (in multiples of Rs 500/-) from the Encash 24 Deposit Account will cease to earn the interest applicable to Encash 24 Deposit.

You even have the facility to auto-renew the FD booked under Encash 24 from a minimum of 6 months and upto a maximum of 5 years.

If you wish to invest in ‘Encash 24 Flexi Deposit’ and know more, click here.

- Fixed Deposit Plus:

With Fixed Deposit Plus, you can earn a higher rate of interest compared to regular rates. Both retail investors and institutions can book Axis Bank’s Fixed Deposit Plus (in single or joint name); however, the minimum investment required is Rs 15 lakh and above, while there is no ceiling on the maximum investment amount.

You can pick from a choice of: short-term; reinvestment; and monthly/quarterly interest payout ––depending on your cash-flow requirement.

But, premature withdrawals from Fixed Deposit Plus are usually not permitted. In case the deposit is held jointly, all holders must sign a declaration, so that in the event of the death of one of the holders, the bank can pay the maturity proceeds prematurely to the survivor.

Note that auto renewal facility is not available for Fixed Deposit Plus.

If you wish to invest in ‘Fixed Deposit Plus’ and know more, click here.

Opt for the one that suits you the best while you endeavour to build wealth.

You may book your bank FD offline (reaching out to your relationship manager at the bank or visiting your nearest branch) or online (via internet banking or mobile banking) –– the choice is completely yours.

And when you invest in bank FD, make it point to have a nominee. A nominee is a person who will have legal right to the FD after your demise. A nominee can be your legal heir (a family member) or anyone who is not a part of the family. So, do not forget to fill in your nomination form and submit it to the bank.

Note that for joint holdings, the nomination process needs to be carried out jointly. In most cases, one can nominate only individuals and not organisations, barring for certain Trusts.

To conclude…

Even in the world of financial engineering and exotic investment products, bank Fixed Deposits (FDs) still remains one of the sought-after investment avenues. Even from an allocation and diversification standpoint, plus for contingency purpose too, do not ignore bank FDs; hold some portion of your investments in it. In time of dire need, a bank FD can be a sort of lender, the last resort – you can take a loan against bank FD.

Even from an allocation and diversification standpoint, plus for contingency purpose too, do not ignore bank FDs; hold some portion of your investments in it. In time of dire need, a bank FD can be a sort of lender, the last resort – you can take a loan against bank FD.

Having a certain sum of money in bank FD is in the interest of your financial wellbeing. So, book a bank FD today!

Happy Banking!

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.