Financial planning is necessary for any individual. The responsibility adds up if you’re a parent. It is just not sufficient to take care of household expenses; as a parent, you need to plan for the future till the time your kids can stand on their own feet.
Most young parents scout for school admissions when their child is starting to understand speech patterns. When it comes to money, you need to start to plan finances much before the birth of your child.
With education costs becoming higher day by day, it has become imperative for parents to look for investment options that deliver returns which can meet the higher education costs for their child. You can also use these funds to meet wedding expenses. There are quite a good number of long term investment options which will prove to be of help when you need the funds.
Fixed Deposits have been a favoured investment option among the different classes of investors. As they are for a specified period, Fixed Deposits are also referred to as term deposits. The term deposit interest rates vary between banks and is dependent on factors like repo rate, state of economy, bank’s cost of borrowing and CRR, being a few of the factors that can cause fluctuations in Fixed Deposit interest rates.
Fixed Deposits offer the following advantages
Safety: Fixed Deposits score high on safety. They are insured by Deposit Insurance and Credit Guarantee Corporation to the extent of Rs. 1 lakh in respect of each bank in which you hold a Fixed Deposit.
Guaranteed Returns: There is an element of certainty as to how much return your FD will offer. Fixed Deposit interest rates India follow interest cycles and locking an FD will ensure that you continue to earn a return all through the tenure of the FD.
Liquidity: When you’re in need of funds, you can liquidate your FD. Of course premature withdrawal can attract penalty, you can overcome this by laddering your FD investments. By holding FDs of varying tenures, you can have funds when needed.
Loan Against FD: Are you in need of urgent funds to pay college admission fees? You can avail a loan against your FD instead of foreclosing. You’ll have the funds and the FD will continue to earn you interest. The interest you’ll have to pay will be about 2% more than the Fixed Deposit rates.
Fixed Rate Savings Bonds
Bonds are another investment option to meet your family’s future financial needs. A fixed rate savings bond is one which gives you a constant return. Bonds carry coupon rate, while Fixed Deposits carry interest rate. Well, Fixed Deposits and bonds yield a specified rate of return, they differ on certain aspects like safety, liquidity, taxation and credit rating.
Taxation: While Fixed Deposits offer a tax saving option under section 80C (5-year tax saving deposits), there are category of bonds, tax-free bonds; the return being completely tax free unlike Fixed Deposit interest income which is taxable.
After Tax Returns: A deciding factor in choice of investment is the effective rate of return after tax. On this front, fixed rate savings bond score over Fixed Deposits. The best fixed-rate savings bonds will yield you a higher return compared to what you earn on your FD.
Capital Appreciation: In the current scenario, interest rates are falling. This impacts the bond price; its value goes up. Your initial investment value has shot up in view of the falling interest. Falling interest rate will reduce your return from the FD, while keeping the initial deposit intact. Further, bonds can be traded in the secondary market, helping you make a profit.
Despite these positive features, Fixed Deposits are certainly a better investment option as their return is not linked to market forces unlike bonds.
A diversified investment portfolio which is regularly reviewed will help you enjoy a comfortable financial position and manage your family’s finances as well as securing funds for their future. One addition to investment in Fixed Deposits and fixed savings bonds, is to have the coverage of a term insurance plan for your family. It is prudent to create an emergency fund as well. This will prove to be a blessing during contingencies. Risk free investment sources like Fixed Deposits and savings deposits are the best to finance your contingency fund.
Financial planning, which includes analysing your future needs, choice of investment, diversification of portfolio, and understanding the present value of money will go a long way in securing your finances and maximise the returns to enable you and your family meet your financial goals.