Investing hard-earned money is better than just saving it, and no one can deny this fact. In fact, more than ninety percent Indians prefer to invest in bank deposits than in stocks or mutual funds, says the source.
A wise investment strategy means you need to choose between various risky and safe investment instruments. Higher risk related to investments comes with higher returns. On the other hand, safe investments are less risky and give comparatively lower returns.
If you are a risk-averse investor, one way to get optimal returns is to invest your money in Fixed Deposit or FD. Indeed, FDs are quite popular amongst beginner investors because it is risk-free. You deposit a certain amount for a fixed period in a bank and earn an interest based on a pre-defined rate. That interest is the return or extra income you receive on your investment.
Another advantage of investing in an FD is that it comes with several payout options. You might have heard about your grandfather visiting a bank every month to get some money withdrawn that he earns with an FD. That’s one payout option of an FD, while there are many others.
What Do You Mean by Payout Options of an FD?
Payout options refer to the ways you can choose to withdraw the annual interest you earn over the amount you invested in the fixed deposit. The number of options you get depends on the bank you choose to invest in an FD.
In general, there are four payout options, namely:
1. Quarterly Payout
It simply means you divide the total interest you earn on your fixed deposit and choose to get it withdrawn after every three months.
Let’s say you have invested two lakhs rupees in an FD in a reputable bank at the interest rate of 6%. So, the total interest you will earn on your investment in a year equals twelve thousand rupees. With a quarterly payout option, you can withdraw three thousand rupees of your additional earning quarterly.
For people who invest in FDs to support their retirement life, this payout option works as a good source of their regular income.
2. Monthly Payout
It is similar to the quarterly payout option except that you get the interest transferred to your bank account every month.
Continuing with the above example wherein you earn an annual interest of twelve thousand rupees – You will get one thousand rupees every month.
The rate of interest you get in this payout option is mostly the same as in the quarterly payout. So, it is up to you to decide which one to choose.
3. Short Term Deposit
Unlike any other FD payout option, this one is unique as it has the shortest maturity period of seven days. This period may vary from one bank to the other depending on their terms.
Since the tenure of this deposit scheme is quite short, its rate of interest is also lower in comparison to the other payout options.
Take another example wherein you invest five thousand rupees in a short-term deposit for seven days at 3.5% interest. You can choose an FD calculator online to find out an approximate earning on your investment in an FD. The total interest amount you will earn at the end of this period equals three rupees. The lower rate of return is one reason why people prefer not to choose this payout option.
4. Cumulative Reinvestment Option
With the above-three payout options, you can withdraw your earning after a specific tenure. What if you want to invest the sum of the principal amount you invested in the FD and the earned interest again?
This is possible with the reinvestment option that comes with an FD. You can choose this option if you do not want to utilize the amount invested in an FD and the interest at its maturity.
Reinvesting it means your new principal investment is higher than the earlier one as it also includes the earned interest. You can ask the chosen bank about more details related to this payout option.
Knowing about the possible payout options can help you choose the right one as per your specific needs while investing in an FD. Alongside this, you are advised to compare the rate of interest offered on FDs by different banks before choosing a bank for this safe investment.