How To Select Bank For Fd

Lately, investment products such as fixed deposits, mutual funds, ULIPs, stocks, structured investment products, equity-linked note (ELN), etc., have seen a lot of innovation, but think of investor comfort, and nothing can beat fixed deposits. Since nationalisation of banks in 1969, people have developed a sense of safety and security towards fixed deposits.

Moreover, for the investors who had burnt their fingers in the current market upheavals, fixed deposits – a traditional saving product – remains a safe bet. But in reality, fixed deposits are not completely safe, which means investors should be careful while selecting a bank with which they want to make a fixed deposit.

Here are a few pointers that can help an FD investor in finding the right bank for his/her investment:

• Safety
  For long, fixed deposits have been preferred by investors as they pose very little or low risk to their investment. Another factor that works in its favour is the assured returns that it gives upon maturity. However, the security risk cannot be overlooked. Investors need to take into account the overall credit rating of a bank before making a decision and ask the bank for a copy of the credit rating report, generated by credit rating agencies. Going for a bank with the highest credit rating, i.e., those with 'AAA' rating, even though it gives modest returns, would be a wise decision. In general, banks with lower credit ratings pay you more vis-á-vis those with higher ratings.
  For example, an FD with a co-operative bank, which generally has low ratings, fetches you more returns than that with a scheduled commercial bank which has higher ratings.
• Rate of Return
  Another important factor that investors should look at is the rate of return. A comparative analysis of rates of return provided by different banks will give them a clear idea about their returns. Even a 50-basis points (bps) or 100-bps up or down in the rate can have a measurable impact on the total return. E.g., an investment of Rs 20,000 at 10 per cent interest rate compounded annually gives Rs 32,210, but at 9.5 per cent it becomes Rs 31,485, a significant difference of Rs 725. For a comparative analysis of fixed deposit rates,
• Effective Return/Compounding Effect
  Compounding factor also plays a major role in deciding returns on fixed deposits. Different banks go for different compounding methods such as Monthly, Quarterly, Half-yearly and Yearly. In Quarterly compounding, interest earned every three months is added to the principal amount. Smaller the period of compounding, higher will be the effective rate of return.
  For example, Rs 10,000 invested for 5 years becomes Rs 16,105 and Rs 16,386 when the interest is compounded annually and quarterly, respectively – a difference of Rs 281. Investors should check this feature with their banks before parking their money in FDs.

Fixed deposits is an all-time favourite investment avenue for risk-averse investors. But that does not mean that they should stick to factors like assured returns and safety of capital; they should also check out the factors mentioned above so as to generate a plus return over and above its conventional rates.