Five things a good old deposit can do in a financial plan

Five things a good old deposit can do in a financial plan?

Investors have extreme views about fixed deposits. For a large chunk of Indian investors fixed deposits are an integral part of their investments and rarely do they go beyond them. For the rest fixed deposits make little sense and they consider that they will be better off avoiding it. However, the smart lot uses fixed deposits wisely to their advantage. They deploy funds earmarked for short term needs into fixed deposits. A wisely-built fixed deposit portfolio can assure safety of capital and also earn decent returns in the short term. Let us understand five ways a fixed deposit can come in handy to make your finances better.

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Funding short term goal?

Each one of us has some financial goal due in a year or two. This can be as simple as paying life insurance premium or payment of kid’s school fee. Funds earmarked for such an expense can be kept in a fixed deposit issued by a reputed bank or a strong non-banking financial company. Some smart investors start a recurring deposit with a Nonbanking Finance Company (NBFC) or housing finance company (HFC) to earn healthy interest rates on their regular savings targeted to achieve a specific goal. Vacation or down payment for a dream car can be done this way without stretching one’s finances.

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Building emergency fund?

Best financial plans fail if there are no funds kept for meeting financial emergencies. An unplanned hospitalisation not covered by health insurance or a loss of job can put a significant strain in financials of a household. An emergency fund equal to minimum six months of households’ expense and equated monthly instalments can help to overcome such a situation. Such money should be kept in fixed deposits. Fixed deposits can be broken as and when required and proceeds can be used to deal with financial emergencies.

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Parking cash aside?

Sometimes we get big payouts – when we get bonus or when we sell some large asset, say a house property. At that moment we may not have a plan ready for utilisation of such funds. In such circumstances, money can be kept in fixed deposits. Let the excitement of large pool of money cool down. Approach an expert and seek help on how to utilise or invest the money in a tax efficient manner. Fixed deposits thus can be a good parking space for your large chunk of cash.

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Can it be a replacement for health insurance??

As age catches up, the premium payable on health insurance goes up. There are umpteen news reports stating premium going up by year on year as high as 30% citing rising age and medical inflation. Whatever be the case, it makes little sense to pay a premium amount more than 10% of the sum assured offered under health insurance. In that case many households stop paying health insurance premiums and let go of their health insurance covers. In some cases, health insurance covers continue, but they are inadequate.?

In the aforementioned situations, funds need to be kept ready to fund hospitalisation. Fixed deposits can be used for this purpose.

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Loan against fixed deposits?

Sometimes households come across a situation in which there may be cashflows mismatch. For example, they expect a large investment to mature in December of a year, but the expense for which the investment was earmarked for calls for a payment a few months in advance in August. To overcome such gaps, it makes sense to take a loan against fixed deposits. In most cases, there is no processing fee and interest rate charged is 2% more than rates offered on fixed deposits. A borrower pays interest for a period she has availed finances. Fixed deposit continues to earn interest. Also, there is no need to break fixed deposit, face premature withdrawal penalty. This facility especially works when the current interest rates on offer for new fixed deposits are far lower than contracted rates on existing fixed deposit. In such cases, if fixed deposits are broken and its proceeds are used to pay for a financial goal, then the money coming in at a later date, needs to be reinvested at a lower rate of interest. Loan against existing FD saves an investor from all such hassles.

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Hence, it is important that you use fixed deposits wisely and fund your short-term goals.

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Disclaimer: This report is prepared in his personal capacity and neither the Author nor Money Honey Financial Services Pvt Ltd assumes any responsibility or liability for any error or omission in the content of the article. Investments in mutual funds and other risky assets are subject to market risks. Please seek advice from an investment professional before investing.

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