The Role of Fixed Deposits in a Balanced Portfolio

A balanced investment portfolio means striking a balance between return and risk, allowing you the ease and flexibility of investing. While building a balanced portfolio, choose different investments that help you stand the test of time. As they say, don’t put all your eggs in one basket. Similarly, don’t park everything in one financial resource, spread it around to enjoy investment diversification. 

So while you may fancy massive returns on stocks, don’t ignore the stability of fixed deposits strengthening your investment portfolio. The high-risk, high-return proposition of stocks needs to be complemented by fixed returns fixed deposits offer no matter which direction the market may be moving towards. Currently, fixed deposit interest rates stand at upto 9.30% per annum. So, in this blog, we have highlighted the role of FDs in investment portfolios. Let’s read on!

Why Diversify Your Investment Portfolio?

Investment diversification is about strategically spreading your investments across assets such as stocks, bonds, debentures, fixed deposits, etc.

But why should someone diversify investments? What’s the benefit that investors will enjoy? Well, diversification allows you to enjoy the benefits of different investments. Secondly, with a diversified portfolio, you, as an investor, will always have something to fall back on should an investment or two witness a fall in value. 

Stocks and bonds, for instance, will always have their ups and downs owing to various political, economic and international developments affecting the market movement. So, opening a fixed deposit at a higher interest rate makes sense. The assurance of receiving the fixed amount regardless of market scenarios wins you many brownie points as an investor. 

Let’s understand with an example. 

You invested INR 1 lakh in stocks and INR 70,000 in fixed deposits. Assuming the market was doing great and your stock and bond investments had a fairytale for say two years. The stock value ballooned to INR 2.5 lakh, while with fixed deposits, you reached 84,584. 

Then comes the third year when stock markets plummeted. So, your stock yield dropped to 1.75 lakh, while your fixed deposit continued to grow at 9.3% per annum to hit INR 92,979 at the end of three years. 

That’s the balance fixed deposits bring to your portfolio with no investment risks.

However, that doesn’t mean stocks are to be discontinued. They can always bounce back and achieve new heights over the long term. It’s just that the stability of fixed deposits will allow you to invest with freedom in stocks, making your portfolio rock solid.

Role of Fixed Deposits in Portfolio Diversification

Benefits of Fixed Deposits

Capital Preservation: The amount you invest in a fixed deposit is immune from market volatility. Whether the market is going up or down, your investment amount remains safe. There’s simply no reduction there. So, be assured!

Fixed Returns: Fixed deposit (FD) returns remain fixed regardless of the market scenario. The return rate, however, remains different for different tenures. The crux is that the return rate at which you book your fixed deposit will sustain till maturity. 

Best Fit for Risk-averse Investors: Fixed deposits are best for investors who want to avoid investment risks while building a strong financial future. 

Regular Income: Fixed deposits also come with non-cumulative options where you get interest payouts at periodic intervals. Non-cumulative FDs suit retirees seeking a regular flow of income.

Liquidity Options: Fixed deposits allow you to withdraw funds before maturity should you face any emergency. You can also take a loan against a fixed deposit to meet your liquidity needs. 

Fixed Deposit Laddering: It’s a strategy by which you can split a bulk investment into multiple fixed deposits with different tenures. With a fixed deposit laddering, you will have an FD maturing when you require liquidity. It will thus help you avoid breaking your fixed deposit while optimising your overall returns.

How Can the Fixed Deposit Calculator Help You in Planning?

As an investor, you must have set your sights on the goal amount. So, it’s important to know the amount you’re likely to receive at the end of your investment tenure. A fixed deposit calculator is where you can see how much you need to invest to achieve your goal amount at the time you want. It’s also a possibility that the income you have now may not allow you to invest the required amount to achieve your goal corpus on time. In that case, you may have to extend your investment time. Figure out all that and more using the fixed deposit calculator.

Steps to Use an FD Return Calculator 

• Enter the investment amount, tenure and interest rate

• Choose from Monthly, Quarterly, Half-yearly and Annual interest compounding options.

• Click on ‘Calculate’.

• Check out the maturity amount, including interest.

Note - Monthly and quarterly interest compounding options help generate maximum interest.

Balancing FDs with Other Investments

Fixed deposits allow you the stability you seek while having high-risk, high-return investments in the portfolio. It’s about making the most of favourable market conditions with strategic investments in stocks and bonds while enjoying the stability of FDs to stay calm when the markets fall. It’s all about creating a balanced portfolio with an optimised risk-return ratio. 

Conclusion

The importance of fixed deposits in creating a balanced portfolio for investors is demonstrated through fixed returns and enhanced liquidity. You can even save taxes by investing in a tax-saver fixed deposit that earns you tax deductions of upto INR 1.5 lakh in a financial year. A diversified portfolio comprising stocks, bonds and fixed deposits is critical in ensuring a happy investment ride for you. 

FAQs

1. What are the benefits of including FDs in a diversified portfolio? 

Stocks, gold, bonds and other investments can undoubtedly generate more returns. However, there are risks. So, having FDs alongside these investments will help you optimise risk and return.

2. How can I calculate FD returns?  

Easy. Just input the investment amount, rate of interest and tenure, choose the interest compounding frequency and click on ‘Calculate’. You will find the maturity amount, including returns.

3. Are FDs suitable for short term or long term goals? 

It depends on the amount you can invest. People putting in a big sum can fulfil both short and long-term goals. However, the rate of interest remains the maximum in a 3-year period.

4. How do FD interest tax rules work?  

The interest earned on a fixed deposit is taxable subject to certain conditions. If the interest crosses INR 40,000 (regular customers) and INR 50,000 (senior citizens) in a financial year, a 10% TDS will apply.

5. What liquidity options are available with FDs? 

You can break your FD anytime, except for tax-saver FDs where there’s a five-year lock-in period. Similarly, you can get a loan upto 80-90% of the bank FD. The loan may not be possible on tax-saver FDs.