Fixed deposits (FDs) are among the financial instruments with a long tradition of being one of the safest ways to save for the future. But with the rise and fall of the financial market with the interest rates, and the changes in the economy, there is always a dilemma for the investors whether they should go for a regular FD or a floating rate FD. It is important to know the specifics of each choice so that you can make a well-informed decision that meets your own financial objectives.
The basics: What are regular FDs and floating rate FDs?
Before going into detail on the user journey, it is important to understand what these are – regular FD and floating rate FD.
Regular Fixed Deposits (FDs)
Regular FD is a traditional deposit account that banks and financial institutions provide that allows you to put a sum of money into a regular FD account for a fixed period of time at a fixed interest rate. The investor can expect a fixed return on the maturity of the investment, which is a low-risk investment. The rates tend to be greater than those of savings accounts, but lower than other investment vehicles like stocks.
Floating Rate FDs
In contrast, a floating rate FD has an interest rate that may adjust at fixed intervals, usually in line with a benchmark rate like the Marginal Cost of Funds-based Lending Rate (MCLR) or the Repo Rate. This kind of FD can give the investors the advantage of the rising rates of interest, thus making them potentially good returns. But it also involves a risk of reduced returns at times of falling rates.
Assess Financial Goals: User Journey.
The first step is to understand your monetary objectives before deciding which to choose, amongst the regular FD and the floating rate FD.
First, you need to determine your risk appetite.
The first step is identifying your risk appetite.
In your user journey, you should look at how comfortable you are with taking risks. Regular FD is a better choice if you prefer having a stable and predictable job. However, if you can accept some degree of risk for potential rewards, a floating rate FD may be a better choice.
User Scenario:
Let’s assume that a retired person, Ms Sharma, is searching for a safe investment that can provide a steady income stream during her retirement. Given her risk-averse nature, she opts for a regular FD, ensuring that her finances remain stable throughout her retirement.
The other way round, Mr. Verma, a young professional, who wants to save maximally, decides to invest in a floating rate FD and takes the bet that interest rates will continue to rise during the coming years.
The second step is to analyze current market conditions.Step 2: Analyze Current Market Conditions.
Now the current economy is an important factor in making a choice between ordinary FD and floating rate FD. Several factors contribute to the interest rate, such as the inflation rate and policies set by the central bank.
User Scenario:
Ms. Sharma might have to compete with the market for better investment opportunities in a low interest scenario to meet her income demands. However she is dedicated to her regular FD’s guaranteed fixed returns.
But at the same time Mr. Verma continues to watch economic news closely as the Reserve Bank of India has indicated rate hikes are in the offing. This knowledge has reinforced his decision to invest in a floating rate FD as he expects higher returns with rising rates.
Step 3: Assess the length of the investment period.
The length of time that the investor plans to keep the investment in for (how long) should also factor into this decision. The tenure of regular FDs is usually fixed, from a few weeks to several years. Though floating rate FDs too provide flexible tenures, they can be affected by the shifting interest rate scenario during the investment period to a great extent.
Also Read – Simple Steps to Open Demat Account and Start Your Investment Journey
User Scenario:
In the above example, if Ms. Sharma intended to invest her savings for a long period, she would prefer to invest it in a regular FD for 5 years, so that she can have some peace of mind in the returns.
Meanwhile, Mr. Verma believes that a floating rate FD for a shorter period with the promise of higher rates in the coming year or two could be beneficial.
Step 4: Compare Returns and Costs
An in-depth study of the possible returns is necessary. Floating rate FDs come with an unpredictable aspect, whereas regular FDs come with definite returns. Before deciding, investors need to consider the performance of floating rates versus regular fixed rates over the past few years.
Consideration Example:
The 5-year term might be safe and reliable, with a regular FD offering an interest of 6.5%. A floating rate FD, however, would begin at 6.0% if it is expected that market rates will go up, but could go much higher in the long-term, even surpassing the interest rates on the regular FD.
Additional Considerations
Tax Implications
There should also be a consideration of tax treatment for both types of FDs. Interest earned on all such regular FDs and floating rate FDs will be taxable based on the investor’s income tax slab. So investors need to consider their net tax situation when determining their investment returns.
Liquidity Needs
Finally, liquidity is an essential element. Some floating rate FDs allow for more flexibility in withdrawals while regular FDs may have penalties for early withdrawals. This might influence an investor’s decision if they expect to be able to reach their money earlier than anticipated.
However, when it comes to closing the deal, it’s important to make the right choice.
The decision between a regular FD and floating rate FD is a personal one and depends on various factors such as risk appetite, market conditions, investment period, return potential, tax aspects, liquidity requirements, etc. Bajaj Finance can assist investors in comprehending their choices and making well-informed decisions aligned with their monetary objectives.
With the changing of the markets, change your investment style. There are advantages and disadvantages to both fixed-rate and floating-rate FDs, and it’s essential to know what situation you’re in to make the best decision. While stability and assured returns are important, so are flexibility and the prospect of increased returns—just be sure to invest in something that reflects your financial objectives.
With a constantly evolving market, it is crucial to stay informed and adaptable to ensure your user journey is successful in helping you achieve financial security.