Fixed deposit, a term which our seniors have tried their hardest to acquaint you with! But in the era of supercomputing and complicated financial instruments, which make it seem like fantastic riches are almost within grasp, and there is no actual way to lose money, there still exists the good old fixed deposit with its humble rate of interest. So, why should we look at something old fashioned and apparently not as profitable as others? Reliability is one major factor. Fixed deposits do not behave in the same unreliable manner in which other instruments work. They are more or less secure and this makes them a very reliable choice. Another major reason is that of an assured pay-out. In a fixed deposit you know the interest rates and the expected outcome right when you make the investment. This gives you a peace of mind which is very rare in the financial business. So, what exactly is a fixed deposit in the first place? It is a kind of financial instrument in which you can invest your funds for a set tenure which will then provide you with a rate of interest in return. The benefit is that it is as simple as opening a savings account and equally risk free but with a higher rate of interest. Now, there are two types of fixed deposits available to the investor.

1. Traditional / Non-cumulative plans

These are the traditional plans you know about. In this case, the principal gets invested for a specific duration and the frequency of the interest pay-out is one which is determined by you.2. Reinvestment / Cumulative plansAs the title suggests the interest in this plan is added to the principal and compounded; the sum total of which is handed out during maturity.Now what are the things you should keep in mind before making a fixed deposit?

• Try Opting for company FDs

Fixed deposits offered by companies have a higher rate of return and usually have more flexible tenures compared to that offered by banks.  

• Choose your tenure carefully

To avoid the monetary penalty most fixed deposits levy on you if a premature withdrawal is made,  make sure that you choose your tenure very carefully  

• Compare different banks

Remember to compare different banks offering different interest rates and options before you make your choice, as an intelligent investor always looks at all his options before making a decision.  

• Split your money

There is a small but a sometimes useful benefit of splitting your money across different banks and different fixed deposits. If you may need to liquidate one of your deposits for an inconceivable reason, then you also have to make sure that there is a deposit you can liquidate immediately without incurring any significant penalties.   So don’t forget to check out the meek and silent fixed deposit before you decide to go through with an investment. But remember no investment is infallible and the same is with fixed deposits.

How often do you hear people say the above things or similar perceptions related to stock markets?

“The stock market is all gambles.”

“Making money in the stock market is all about luck.”

Once in a while you also learn about some people who are making huge gains in the market. Is there some magic formula? But first let us turn the matter around slightly. Why people prefer trading over long term investing? Why? What is the reason of this obsession towards trading? Trading is a fast way of attempting profits as compared to long term investing because in trading, the make or break happens at a short span of time. It is buying or selling a particular security within a stipulated time period, for that matter, not more than 3 months. Most of the trading takes place through the help of leverage and special instruments, such as derivatives. What’s more scintillating in this is that, those special instruments can be traded in margins, as well. Margin is simply a proportion, which has to be paid by the trader to get positions into the securities. For Eg. If someone wants to buy SBI shares @ 200, he can do it by entering into a derivative contract for a month or wherein he can pay only 20% of the cost of SBI, roughly. And even this cost is also leveraged (i.e.) paid by the broker. This makes a psychological impact in the mindset of the trader that he is probable of gaining something by not paying any money from his pocket. On the other hand, long term investment does not allow making abnormal profits in a short duration of time. It requires studying market for longer term to get great insight into financial markets. And one who is wanting to invest genuinely in the market should also take into consideration the time frame aspect wherein one should lock his money at least for a year or so in those particular securities, practically, for getting decent returns. Though it is highly liquid one cannot liquidate his securities when at a loss. In simple, trading is just like the game of numbers, which is say the volume, wherein you take huge positions in securities through margins and leverage and try to get 5-10% profit on the same, overnight. Wouldn’t the reason of getting thousands on a day on day basis without putting in much of your corpus, makes it attractive ? Though, trading looks attractive to people, they become addicted to trading and they often make quick decisions with high risk and cost. But In trading, making right moves is much more important than moving quickly. This is the reason we often hear people failing in stock markets. This does not mean that the risk of failure extinguish here in long term investing. Long term investment, requires a certain amount of skill and research to make good long term investment decisions. To wait and watch, and take the time to learn what works, and what does not. The decision is on what appeals you the most because there are pros and cons to each trading as well as long term investing. But what decides whether you want to trade or invest for a longer term is dependent upon your own ultimate goal i.e., if want profits in shorter terms or longer terms. One must set their goal straight and then choose to attempt profits in financial markets.

This blog is written by Neha Parihar, MBA-FP 2015-2017 batch, ICoFP Delhi campus.