Investments are a multi-dimensional process. In order to be successful at investing, one of the key elements you have to look into is portfolio diversification. One of the best savings options to add to your portfolio to mitigate risk is fixed deposits. It is one of the safest and oldest savings options available in the market. It has been the first choice for low-risk appetite investors who wish to save their funds in a fixed income instrument that provides guaranteed returns. Most financial institutions offer great interest rates on FDs compared to the interest that is provided on current or savings account balances.
Why Is Portfolio Diversification Important?
Portfolio diversification process involves allocation of funds that are available for savings/investment in various asset classes. This process does not stop at just allocating assets to create an investment portfolio. It is also important to monitor the performance of these investments as well and rebalance the portfolio occasionally depending on how well they are doing in the market.
Some of the reasons as to why portfolio diversification is important are:
Risk protection: Investing funds in various asset classes come with different degrees of risk. That being said, it is imperative that you invest to get inflation-beating investment returns. You have to diversify our portfolio in order to protect against the investment risk. This way, you can spread the funds available for investment across different asset classes such as debt, stocks, equity, real estate, gold, etc, and protect against the fluctuations in any sector.
Improved portfolio returns: Certain investment areas such as the real estate and stock market are highly volatile in nature. Hence, just investing in these asset classes might not be a good idea and you might not get good returns consistently. It is therefore important that you, as an investor, invest across various assets like FDs, debt instruments and gold to create a balance in your portfolio returns.
Exposure to other sectors: When you diversify your portfolio, you basically invest across various sectors. It is difficult to predict which sector will perform well and provide good returns versus a particular sector that might not perform all that well.
High liquidity: A lot of people allocate a big chunk of their corpus to safer investment schemes such as PPF or NPS. Though these investments provide high capital safety, they also have varying lock-in periods. Hence, in case of a financial crisis, they cannot provide the much needed liquidity. With diversification of investments, you can include various asset classes in such a way that there are some long-term safe investments as well as highly liquid investment options.
Reasons Why You Need to Add FD in Your Investment-Portfolio
There are various benefits to adding an FD in your investment portfolio. Some of these benefits are:
You can reduce overall portfolio risk by adding FD: A thoughtful asset allocation is the deciding factor of wealth creation in the long run. Various asset classes such as fixed income product, equity, gold, debt, etc play various roles in your investment portfolio.For instance, investing in mutual funds gives your funds the ability to grow over a period of time, whereas putting your savings in a fixed income instrument such as an FD gives the assurance and security of guaranteed returns on your investments.When you have a portfolio with the right asset mix, there will be minimal volatility in your overall returns.
FDs are a great option for fulfilling your short-term goals: When savings are concerned, FDs is a savings option that promises guaranteed returns upon maturity. Hence, FDs are great if you have a financial milestone that cannot wait. If you need a specific corpus of money within a particular time span, opt for FDs.Whenever you invest for a shorter span of time, it is important that your investment amount is preserved and you get good returns at the same time. FDs are great for short-term goals that you wish to achieve in a year or two.
For instance, in case you are planning to go on a trip with your family and you want a specific amount of money for the trip. All you have to do is come up with a rough estimate of the vacation cost and the exact time period to achieve the goal. Using the online fixed deposit calculator, you can find out the returns you will be receiving upon maturity. After you compare the rates of interest offered by different financial institutions, you can set the tenor and initial investment amount accordingly.
FDs provide income tax benefits: In addition to the normal FD accounts, certain banks also provide the five-year tax-saving fixed deposit scheme that helps with tax deductions.You can claim a tax deduction of up to ₹1.5 Lakhs when you invest in one under Section 80C of the IT Act of 1961. However, kindly note that the interest that you earn on these is taxable and these FDs have a minimum lock-in period of 5 years.
FDs provide guarantee of returns: Whenever you invest in an FD scheme, you know the amount that you will be receiving at maturity earlier itself. It does not matter if the economy is up or down or how the rates of interest fluctuate, you will be receiving the returns that you were promised at the time of making the deposit. This way, there are no surprises at the end of the tenor and you can save money for your financial future in a better way.
Now that you are aware of the benefits of adding FDs to your investment portfolio, make sure that you use the online fixed deposit calculators available online. This helps you with getting a rough idea about the returns that you can expect. Kindly conduct proper research and compare the various interest rates provided by different lenders and choose the one with the highest FD interest rate before you lock-in your choice.
Interesting Related Article: “The Ultimate Guide to Real Estate Investing: 5 Tips for Success“