Several banks and financial institutions are providing interest rates as high as eight per cent on fixed deposits (FDs). This presents a favourable investment prospect for cautious investors seeking to increase their wealth without exposure to market risks. However, not everyone can afford to invest in large fixed deposits at once. Consequently, some individuals opt for smaller fixed deposits, enabling them to take advantage of fluctuating interest rates. The underlying concept behind these investments is to foster the growth of capital and generate additional income over the long term.
While some may advocate for recurring deposits, it’s essential to have a steady income stream to consistently invest at predetermined intervals. This is where choosing systematic deposit plans (SDPs) can be beneficial.
What is a systematic deposit plan?
A systematic deposit plan is an investment option provided by certain banks and financial institutions. It enables individuals to make consistent, fixed-amount deposits into an FD over a predetermined period. Essentially, it combines features of both an FD and a systematic investment plan (SIP).
Not many people are aware of how an SDP works. Simply determine the desired investment duration (tenure) and the monthly deposit amount to get started. With a minimum deposit requirement of as low as ₹500, it becomes an accessible option for a wide range of investors.
Subsequently, initiate regular deposits by contributing the specified amount to your SDP each month. Each deposit functions as an independent FD with its distinct maturity date. Every deposit accrues interest at the prevailing interest rate on the date of its initiation. This results in the advantage of compound interest, wherein the interest earned on each deposit is reinvested.
Upon the completion of each deposit’s tenure, you receive both the principal amount and the accrued interest. The payout can be opted for either every month or after the entire investment period.
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How do you benefit from investing in an SDP?
There are various advantages to consider when investing in an SDP. Some of these encompass:
- Flexibility: You also have the option to select a flexible tenure based on your preferences. Opting for a longer-term allows you to capitalize on compounding for higher returns, while a shorter-term investment is feasible if you have specific short-term financial goals. Commence with a modest sum and incrementally augment your investment as time progresses.
- Fixed interest rate: Once a deposit is made, the interest rate remains constant throughout its tenure. This assures the stability of both the principal and maturity amounts, alleviating concerns during the investment period.
- Compound interest: Acquire interest on both the principal and the accrued interest, leading to substantial returns over the long run.
- Premature withdrawal option: SDP allows for premature withdrawal, providing the flexibility to access your deposit before its scheduled maturity in case of any urgent financial requirements.
- Safety: These plans are deemed secure investments, backed by the guarantee of the bank or financial institution facilitating them.
- Market protection: In contrast to market-linked investments, SDPs remain unaffected by market volatility, presenting an ideal option for risk-averse investors.
The flip side of SDP investments
However, not all is great about putting money in SDP investments. Consider the following factors when contemplating an SDP.
- Interest rates: Typically, SDP interest rates fluctuate based on the chosen tenure and current market rates. It’s advisable to compare rates from various institutions before making a decision.
- Liquidity: Keep in mind that your funds are committed for the selected tenure of each deposit, and early withdrawals might incur penalties.
- Tax implications: Note that the interest earned on SDPs is subject to taxation based on your income bracket. Be aware of the tax implications associated with your earnings.
In general, SDPs represent a favourable choice for investors seeking a secure and gradual growth of their funds. They are especially well-suited for risk-averse individuals exploring alternatives to conventional savings accounts or market-linked investments.
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Published: 27 Dec 2023, 10:58 AM IST