Archive for the ‘Investments’ Category

Time deposit is referred as Term deposit, bond, or fixed deposit in different countries. As referred in India, we will refer these time deposits as Fixed deposits.

Consider the scenario:

I have Rs.25,000 in my savings account in a bank  and I am sure that I will not need Rs.20,000 for the next one year. If the money is kept in the savings account itself, the rate of interest will be the same low bank’s interest rate (around 3.5 percent as of May 2011). Else, I shall open a deposit account with that amount of money with a higher rate of interest for a particular time period. Such a deposit is called as Fixed deposit (F.D).

The period of investment in a F.D. varies from 7 days to as much as 10 years in most of the banks. There are new deposit schemes which are available now with various banks to provide flexibility. Let us say, I have a Rs.20,000 F.D. linked to my savings account with Rs.5,000 balance. I shall withdraw Rs.10,000 from my account. The excess Rs.5,000 will be deducted from the F.D. and the remaining Rs.15,000 in the F.D. will be continued for the whole period.

Rate of interest ranges from around 4 percent to around 9.5 percent. Rate of interest for the senior citizens are usually greater than the normal citizens by around 0.5 percent. There are certain options regarding the receivable interest such as Monthly interest, Quarterly interest, Interest receivable on Maturity, etc.,. Interest receivable on maturity provides you the maximum rate of interest. Other interest payments usually have lesser interest rates, but you will get the interest of the amount in short intervals. We shall opt for the mode of  receiving interest based on our needs.

You need to provide your PAN (Permanent Account Number) details to the bank while you open the F.D. or you need to submit a Form 15G (for normal citizens) or form 15H (for Senior citizens), which is the rule 29C of the Income Tax Rules, 1962 “declaration of the person claiming the receipt of the income without tax deduction”.   If you didn’t, TDS (Tax Deduction at Source) (20% of the interest earned as income as of May 2011) will be deducted.

Tax exemption can also be availed for F.D.s with the duration of investment more than or equal to five years. This clause is included recently in the Section 80C of the Income Tax Act,1961. A maximum of One lac rupees or Rs.1,00,000 will be exempted on the income under this clause.

It is a good practice to register nomination for the F.D.s. In case of death, the bank just demands Death certificate for death claim, if nomination is registered. Else the process to claim the amount in the F.D. in case of death becomes really complex. In that case, we need to provide NOC (No Objection Certificate), Legal Heir Certificate, Death certificate, and a set of other forms. So better go for nomination whenever you open an F.D.

From the investment perspective, it is one of the least risky investment with good returns. For those who are not well aware of ULIPs (Unit-Linked Insurance Plans), Mutual Funds, and Share markets, and other risky investment instruments, Time deposits are the best investment tools.

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Consider the scenario:

I need money (e.g., INR2,00,000) to start a business. I may borrow the money from a single person or several people at a particular rate of interest with a scheduled repayment date.

Debenture is similar to this. It is a loan agreement through which a company raises funds for its business needs. The loan agreement is called as an indenture. The indenture contains the coupon rate i.e., the rate of interest and the repayment date mentioned on it. Often this loan has a higher rate of interest than that of fixed deposits, however this loan doesn’t have any collateral. It backs only on the integrity of the company issuing the debenture. This is the risk involved in debentures.

There are two types of debentures – Convertible and Non-convertible. Convertible debenture has a provision to be converted into shares after a prefixed period, whereas Non-convertible debentures doesn’t. This feature is to attract the investors in buying the debentures. But if it is a convertible debenture, it will have a lesser rate of interest than the Non-convertible debenture.

Considering the small risk involved, debentures are better investment tools.

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Finance #00

I’m going to pursue my MBA this year. In this span, I will be learning a lot about finance. I’ll share my learnings with all of you.

Money, created by human beings, plays the human beings to do two things as it wishes. One is to earn money and the other one is to protect the money we earned.

To earn money, one needs to work hard and needs to have the right attitude and mentality. No one else can help in this.

But to protect it there are a lot of ways. If this part is particularly easier, we shall relax our earning part. I’m mostly going to concentrate on this part.

Hope it will help. Do give your suggestions.

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