Making Money Flow—Fixed Deposits as Liquid Assets

Fixed Deposits find a place in every investor’s portfolio. Scoring low on risk and high on returns, you’ll be hard-pressed to find a good investor who hasn’t yet invested in Fixed Deposits.

These are high interest-yielding term deposits which also enjoy insurance coverage from Deposit Insurance and Credit Guarantee Corporation. In case a bank defaults, you should know that the insurance coverage is restricted to Rs.1 lakh per customer per bank.

Returns on Fixed Deposits

Just as other assets like house property, equities and bonds yield returns, you earn interest on your Fixed Deposits. Fixed Deposit interest rates in India vary between banks and are governed by factors such as CRR, SLR, inflation in the economy and—most importantly—RBI guidelines.

The best advantage of Fixed Deposits is that you are fully aware of the amount that you will get on hand at maturity. You can use a FD interest calculator to determine how much interest you earn on the sum invested.


The extent of liquidity

Contrary to the belief, Fixed Deposits are actually liquid assets. In case of an emergency, you can liquidate your FD and get the money. Pre-closure before the maturity date results in a loss of interest though.

Let’s say you’ve opened a 3-year FD that fetches you a return of 8%. If, after 1.5 years, you need to liquidate the same, the interest you earn falls to about 7%. The procedure is fairly simple—all you need to do, to liquidate your FD, is to hand in an application to the bank.

Senior citizens have an affinity towards Fixed Deposits. To ensure monthly cash flows that can take care of their affairs, they can choose to receive an interest on their FDs at monthly rests.

Are you in need of a loan to meet your obligations? The obvious course of action here would be to avail a Personal Loan. However, although obtaining a Personal Loan is easy, interest rates are high as a Personal Loan is an unsecured loan. Instead, the FD that you hold can serve as a collateral to your Personal Loan. Some banks also offer an overdraft option, which is well above the FD value provided you enjoy a good credit score.

The benefits of taking a loan against FD

Your FD continues to earn interest, while still remaining your asset. You also get access to funds through a loan against the FD and the rate of borrowing will be just 1-1.5% more than the FD interest. In a very real sense, this is a very lucrative option, making use of the credit facility offered by the assets in hand.

The next time you’re computing your liquid assets, include your FDs in the list as well. By laddering your FD investments, you can easily avoid a liquidity crunch.


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