Fixed deposit is a very conservative financial product and is preferred by mostly senior citizens as it is considered safe. The elderly view deposits as a long-term investment and on an average commit their money for three to five years. Now that fixed deposit interest rates have fallen, many feel that there is a need to earn more money.
There is another category of investors that invests in mutual funds and opt for dividends. Most of the times, the salaried who opt for this and receive dividends from mutual funds don’t use them. The money is kept idle in their savings account.
Both these categories of investors can reinvest their income to earn more money.
There are several options available for such reinvestment. However, only some come with ease of liquidity as well as good returns. For instance, you can invest the interest from your deposit in the National Savings Certificate (NSC) or the Public Provident Fund (PPF). Both these investments provide tax benefits under section 80(C) of the Income Tax Act but your money will get locked in for many years. That’s why you need to carefully choose the investments based on your financial needs, risk profile and other related factors. Here are some options you can consider.
If you are getting a monthly pay-out
If you are not going to use the interest on your deposit and it is lying idle in your savings account, consider investing in the following options for better returns.
Bank Recurring Deposit
Choose from the Recurring Deposit schemes offered by your bank where you hold your saving account. For instance, you had invested Rs. 4,00,000 in a deposit for 10 years at the interest rate of 9%, you will be getting a monthly interest of Rs. 4,000. You can reinvest this income to earn more by putting it in a Recurring Deposit.
If you invest Rs. 750 from your interest income in a Recurring Deposit for five years, you will be receiving Rs. 54,735 on maturity. This is assuming that you invest at the interest rate of 7.5% for ever year. How is this an advantage? If you had let that amount be in your saving account, you will earn only Rs. 4,500 as interest in five years if the savings account interest rate is 4%. However, if you invest it in a Recurring Deposit, you will have earned an interest of Rs. 9,600.
Here are the advantages and disadvantages of investing in a Recurring Deposit.
One of the main advantages is that you get the same interest rate as your fixed deposit. The rate will be higher for senior citizens. You can invest a fixed amount every month, ensuring discipline. You can choose to invest for either short term or long-term goals as the tenure for Recurring Deposit is between six months and 10 years. You can get loan as an overdraft facility for your Recurring Deposit. The best part is that there is no Tax Deducted at Source (TDS).
The only disadvantage with Recurring Deposit is that you can get no tax benefits.
If you are getting an annual pay-out
Corporate deposits
If you are receiving an annual income from your investments, you can consider investing the income in a corporate deposit. You can choose from one year, two-year, three year and five-year corporate deposits. You can even ladder your investments by investing every year. For instance, you had invested in a 10-year deposit that gives you interest at 9% and you are receiving Rs. 9,300 as interest. If you invest this income in a one-year corporate deposit that gives you the same interest rate and keep laddering the investments for five years, you will have earned an interest of Rs. 5,000 at the end of five years. Note that as long as you invest in rated corporate deposits, the risks are lower. Laddering helps you review the deposit every year and you can choose to reinvest the maturity amount in better options at the end of every year.
The main advantage of corporate deposit is that you get a higher interest rate when compared to fixed deposits and Recurring Deposits. You could even getachoice of monthly, quarterly, half yearly and annual interest payouts for your corporate deposit. Another advantage is that there will be no TDS for your deposit if interest earned is less than Rs. 5,000.
The main disadvantages of corporate deposits include no tax benefits. The ease of getting your money back is much lesser when compared to bank fixed deposits. Another disadvantage is that there is higher credit risk involved. You may need to keep track of the deposit ratings and the company’s performance.
Mutual funds
Investing in mutual funds can help you overcome the disadvantages of corporate deposits. You can invest your income using SIP or a lumpsum in direct mutual funds. Equity mutual funds can give you returns that beat inflation.
Here’s a table that will help you understand how much you can save by reinvesting your income from investments.
Pre-tax returns
| Amount reinvested | Investment used | Interest rate on the reinvestment | Maturity amount |
| Rs. 750 per month | Recurring Deposit | 7.5% | Rs. 54,735 |
| Rs. 9,300 per year | Corporate deposit | 9% | Rs. 60,664 |
| Rs. 9,300 per year | Mutual fund | 12% | Rs. 66,172 |
Note that for the investments made, the tenure is assumed to be five years and compounding for Recurring Deposit and corporate deposit will be quarterly.
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