Fixed deposits have long been the favored investment instrument among Indians. This is because of the capital protection they provide. This is especially good for senior citizens who have a low-risk appetite. Still, you have to choose between the many competing offers from various banks and NBFCs to select the best-fixed deposit plan for senior citizens. Here are a few things to keep in mind:
The interest rate offered on fixed deposits varies based on the tenure and the institution offering the deposit. Most offer a higher interest rate for senior citizens compared to the rate offered to other customers for the same tenure. While it may be tempting to simply choose the highest fixed deposit interest rates for senior citizens, it is important to remember that it is only one among the many factors that decide your choice. As the interest rate varies based on the tenure of the deposit, it is important to first define your financial goals and then select the right fixed deposit to meet your requirements. For example, if you foresee a need for liquidity in the near future, you should not put all your monies in fixed deposits with longer tenure just to earn higher interest.
Tenure on fixed deposits varies from as short as 7 days to as long as 10 years. You should choose the tenure based on your financial goals and not just the interest rate offered. Further, you should keep an eye on how the interest rate is expected to move in the future. If the interest rate regime is being revised downwards, you should opt for a longer tenure to lock into the current interest rates. On the other hand, if you expect the interest rates to rise then shorter tenure would make sense as you can ladder into the highest fixed deposit interest rates for senior citizens by reinvesting on maturity.
Remember the age-old rule: higher risk requires higher promised rewards to justify the investment. That said, a higher risk also means that you may not earn the promised rewards at all. As senior citizens do not typically have a chance to recover from financial misadventure, ensure that you invest with institutions that have high credibility. Check for ICRA, CRISIL, etc. certification and credit rating given to the instrument you are planning to invest in before making a decision.
Fixed deposit (FD) offers two ways of taking the interest home:
- Cumulative FD compounds the interest and pays it out on maturity
- Non-cumulative FD periodically pays out the interest earned and returns the principal on maturity.
If you are looking to meet your liquidity requirements through returns on the fixed deposits, non-cumulative FD is a good option to generate a regular income. On the other hand, cumulative FD allows for investment appreciation and earn much higher interest due to compounding. As most senior citizens do not have a source of regular income, they may prefer non-cumulative FD while regular investors benefit more from a cumulative one.