Investing 101 – Investing in Fixed Deposit

03/02/2023 Kathirnathan Ragulan

Let’s understand the basics of investing in fixed deposit in srilanka, fixed deposit is one of the most used investment method in Sri Lanka, fixed deposits (FD) also known as time deposit (TD), investing in fixed deposits are not a big brainer, the investor need to concenrate on few elements to make it a good investment option. lets dive in

Investing 101 is a series of short reads explaining the basics of investing and the investment options available to us, you can read the first three article using the below link

We Sri Lankans, like to save and we used to save for various requirements, for education, wedding, travel, medical and retirement are few reasons for saving, that’s why fixed deposits became a most sought-after investment method where the investor can save while enjoying high returns compared to savings. A fixed deposit can be placed for 3,6,12,24,36,48,60 months’ period and return (interest) can be earned monthly or maturity, depends on the options given by the managing bank or finance company.

Srilanka has a well-regulated banking system and central bank of Srilanka is monitoring all banks and financial institutions under strict regulations, however, fixed deposits are not totally risk free, there are few factors to be considered before depositing your hard earned money with any of the banking and financial institutions as there were incidents where central bank approved institutions mismanaged the funds and depositors are still fighting to get their hard earned money back.

Following are the key factors to consider before placing a fixed deposit with any approved institutions

1. Priority goes to the stability of the deposit-taking institution (Security)

First priority should be given to the stability and the financial strength of the deposit-taking institutions, do a small research about the bank or the finance company before placing the fixed deposit, you can go through the annual report of the company or you can check the FITCH and IKRA ratings of the institutions to understand their financial stability.

Placing your hard earned money with a reputed and strong institution might give you a slightly lower return than a volatile company, but your money is secured and you can liquidate as and when required.

2. Spread your investment with multiple banks and finance companies

Don’t put all your eggs in one basket, this simply means don’t put all your money with a single institution, consider investing with multiple institutions, if you have Rs 5 lakh to invest, split it into 3-4 investments across different banks and financial institutions. this will safeguard your money with an added advantage is in case of an emergency, you won’t have to break the entire deposit. This means that you will have to pay the premature withdrawal penalty only for the sum that you need, even as the rest of the money keeps growing.

3. Consider the charges and taxes

Fixed deposits are liable to premature withdrawal charges, make sure to understand the penalty structure when premature withdrawals, this will help you avoid heart attacks in an emergency. Also, you should be aware of the tax structure for the income earned from a fixed deposit, currently there is a WHT (Withholding tax) system in place and there are some exceptions for senior citizens (55 years and above).

4. The rate of return comes last

While return is an important factor for an investment, you should deal with safety and security first and return should be your last concern, the similarity of the collapsed banks and financial institution is fund mismanagement and high rate of return offered for the deposit holders, most of the investors went behind the high return are still suffering, don’t get fooled by the high interest rate advertised by some institutions, they are in real need of money (a symptom of mismanagement of funds) so they are ready to offer high rate of interest.

5. Invest with licensed institutions

The central bank of Srilanka monitors all the banks and financial institutions and they frequently publish the list of licensed deposit-taking banks and institutions, however, all the licensed deposit-taking institutions are not 100% safe and do your own research before placing your money with them.

Disclaimer: The information contained in this article is for informational purposes only, should not be considered as an investment advice. Always make sure to do your own research, talk to your financial advisor and/or seek independent advice where appropriate & necessary.