How to effectively use FDs in building your investment portfolio?

New Delhi : Building a robust investment portfolio requires a savvy mix of financial instruments, and FDs can be a reliable cornerstone. If you're keen on exploring secure avenues that offer steady returns, Fixed Deposits (FDs) might be your golden ticket. 

Discovering the ways to strike the perfect balance between risk and reward is an important aspect of financial planning. Choosing the right investment mix and using secure investment options like fixed deposits can be a great way to protect your investment portfolio. In this article, we will unravel the art of effectively incorporating FDs into your investment strategy and unlock the secrets to a successful investment journey!

What are fixed deposits?

Fixed deposits are the traditional financial instruments that are most preferred for the safety and stability that it provides. Fixed deposits are offered by banks and non-banking financial corporations (NBFCs). In a fixed deposit account, you deposit a lump sum amount for a fixed tenure and earn interest at a predetermined rate. The interest rate for fixed deposits varies depending on the tenure chosen and from one financial institution to another.

There are various types of fixed deposits available such as standard fixed deposits, special fixed deposits, tax-saving fixed deposits (locked-in for five years), senior citizen fixed deposits (with a preferential rate of interest), flexi fixed deposits, and corporate fixed deposits, etc. You can invest in a type of fixed deposit that suits your needs and goals. 

The role and benefits of FDs in an investment portfolio

Fixed Deposits (FDs) play a pivotal role in diversified investment portfolios, providing a sturdy foundation for your financial aspirations. Fixed deposits provide key benefits and help you build a well-balanced investment portfolio:

1. Bursting with reliability and security, FDs offer a haven for risk-averse investors seeking steady returns.

2. They act as a shield during turbulent market times, cushioning against market fluctuations. 

3. With FDs, you can calibrate your risk exposure, striking an optimal balance between safety and growth. 

4. Humanising your investment journey, FDs offer peace of mind and a sense of control over your financial future. 

5. Seamlessly blending with other investments, FDs add stability and predictability, making them an indispensable asset in your well-crafted portfolio.

6. Along with stability and safety, fixed deposits also offer liquidity by giving an option of partial withdrawal.

7. You can avail of credit cards and loans against your fixed deposit investment.

8. Investing in tax-saving fixed deposits offers tax benefits under Section 80C of the Income Tax Act, 1961 for up to a maximum investment amount of INR 1,50,000.

However, it is important to consider the potential pitfalls of investing in fixed deposits before you decide on your investment amount. They are ideal for risk-averse investors craving a safe harbour. However, there are risks to reckon with – FDs may yield lower returns compared to market-linked investments, denting your potential gains. Additionally, locking funds in FDs restricts liquidity, making quick cash access a challenge. Tax efficiency and the impact of inflation on fixed deposit needs to be considered before you decide your allocation into fixed deposit investment. 

Before investing, you can calculate fixed deposit returns using an FD calculator to make a rational investment decision.

Tips to effectively use fixed deposit in building an investment portfolio

It's essential to assess your financial goals properly and then strike the right balance to build a solid portfolio. Humanize your decision-making process, understanding how FDs fit into your unique investment journey. Here are a few important tips to incorporate fixed deposits effectively in your investment portfolio:

1. Setting clear financial goals

Clear financial goals are the compass that guides your journey while integrating FDs into your investment portfolio. Define your aspirations – whether it's saving for a dream vacation, securing your children's education, or building a comfortable retirement. 

Having a roadmap in place humanises the process, giving you a tangible vision of your financial future. Be specific and realistic, setting achievable milestones to track your progress. With crystal-clear goals, FDs become a powerful tool, aligning with your aspirations and acting as stepping stones toward financial success. Fixed deposits can be a great strategic investment choice for your short-term financial goals and to set aside an emergency fund. Calculate fixed deposit returns using an FD calculator to know how much to invest to reach the target.

2. Determine the right allocation for FD

Crafting the perfect recipe for successful investment involves a strategic allocation. Evaluate your risk appetite, time horizon, and financial objectives. Strike the right balance between FDs and other investments, and build a portfolio that aligns with your unique needs. 

Flexibility is key! Consider diversifying your allocation to explore greater opportunities while safeguarding your capital. Embrace the power of FDs as a cornerstone, harmonising with your financial aspirations. Remember, the right allocation propels you toward a fulfilling and rewarding investment journey!

3. Choosing the right FD tenure and interest rate

When it comes to FDs, choosing the perfect tenure and interest rate plays an important role in your investment game. Consider your financial goals and the time frame to achieve them. Tailor the tenure to match! Compare interest rates for different tenures and invest wisely. You can also use the FD calculator to Calculate fixed deposit returns and compare various options.

Invest in FD based on your risk tolerance and market outlook. Remember, the right blend of tenure and interest rate unlocks the door to maximised returns. 

4. Diversification: balancing FDs with other investments

Diversification is extremely important to build a successful investment portfolio. Mixing the reliability of FDs with the vigour of other investments can help you balance risk and reward.

The stability of FDs complements the risk-return potential driven by the volatility of market-driven investments like stocks, bonds, or mutual funds. By spreading your bets across different asset classes, you safeguard against potential losses and let your portfolio thrive. Stay dynamic and agile, adjusting your mix as circumstances evolve. 

Conclusion

In conclusion, fixed deposits can be effectively used to build a successful investment portfolio when you are armed with clear goals, and invest in the right mix of asset classes. It is important to decide the fixed deposit allocation in your portfolio considering the benefits and pitfalls.