How to choose the best Fixed Deposits (FDs) in India?

As a retail investor looking to book an FD, you will encounter a few important options when you decide to choose the best fixed deposits:

• Should you choose a large commercial bank or a small finance bank?
• What interest payout option should you choose?
• How can you compare the interest rates of different FD schemes offered?

Should you choose a large commercial bank or a small finance bank?

When it comes to investing in fixed deposit (FD) schemes, choosing between small finance banks (SFBs) or large commercial banks, is a significant decision that can impact your returns as well as the safety of your investment.

Comparing Interest Rates

One of the most compelling reasons to consider SFBs for FD investments is their higher interest rates. SFBs typically offer interest rates that are 1-2% higher than those of large commercial banks. You can compare the interest rates of smallcase’s partner banks with those of prominent large commercial banks.

The higher rates are due to SFBs’ need to attract a broader customer base. By offering more attractive deposit rates, SFBs have a competitive advantage to attract potential customers away from established commercial banks.

Operational Efficiency and Cost Management

SFBs leverage digital distribution mediums (like smallcase) extensively, allowing them to reach remote and underserved communities without the need for a large physical branch network. This digital-first approach reduces their operational costs, which they can pass on to customers in the form of higher interest rates. 

Safety and Regulation

When it comes to the safety of your deposits, SFBs are on par with large commercial banks. Deposits in both types of banks are insured up to ₹5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC). In the event of a bank’s failure, depositors are guaranteed to receive the insured amount within 90 days.

What interest payout option should you choose?

Fixed Deposits (FDs) may offer various options for interest payouts, such as monthly, quarterly, half-yearly, annually, or at maturity. While you choose the best fixed deposits plan as per your requirement, these are the few cases to be considered –

For instance, if someone wants a monthly source of income, they can choose a monthly payout scheme. Alternatively, if someone needs to pay off a semiannual liability (like college fees) with their interest income, they can choose a semiannual payout scheme.

As of today, smallcase only offers schemes that have a payout at maturity of the FD.

How can you compare the interest payout of different FD schemes offered?

FDs where the interest payout frequency is maturity, that offer compounding interest on the deposit, where the interest earned is reinvested periodically (quarterly, semi-annually, or annually), leads to higher overall returns. The compounding frequency varies depending on the FD scheme. FDs with quarterly compounding frequency will have a higher interest yield than ones with semi annual or annual compounding frequency.

As of today, smallcase only offers schemes that have a quarterly compounding frequency.

Here’s an example of how an higher compounding frequency leads to higher interest yields:

Here we have calculated the annualized yield for the above two examples:

Clearly, CASE 2 offers better returns, as we can see.

When comparing two fixed deposit (FD) schemes with the same tenure, investment amount and interest rate, the one with the higher compounding frequency will have a higher annualized yield, making it the better choice. Hence FDs with quarterly compounding frequency will have a higher interest yield than ones with semi annual or annual compounding frequency.

Fixed Deposits on smallcase provide a secure and straightforward investment option, offering high interest rates and convenience of a fully digital process. Whether you’re looking for stable returns or diversifying your investment portfolio, FDs on smallcase are an excellent choice. Start investing today and enjoy the peace of mind that comes with safe and reliable returns.