Fixed Deposits for Diversification of Investment Portfolio

December 03, 2024

how-to-diversify-investments-with-fixed-deposits

Investing is an essential part of growing your wealth and achieving financial goals. However, investing in a single asset class or instrument can leave your portfolio vulnerable to market fluctuations and volatility. That's where diversification comes in. By spreading your investments across different asset classes, you reduce risk and maximise potential returns. One effective way to diversify your investment portfolio is by including Fixed Deposits for diversification. 

 

In this article, we will explore the importance of diversifying your portfolio with fixed deposits. We will discuss the benefits of fixed deposits for diversification, the role of fixed deposits in mitigating risk, and how they complement other investment instruments. 

 

Benefits of Diversifying Your Investments 

Diversifying your portfolio means spreading your investments across different asset classes and investment instruments. The primary benefit of diversification is risk reduction. 

 

By investing in a variety of assets, you minimise the impact of any single investment's performance on your overall portfolio. For example, in a volatile market, FD investments can help in balancing the losses. 

 

It also allows you to tap into multiple sources of potential growth, thereby increasing the overall potential for returns. 

 

Stability and Capital Preservation 

Fixed deposits offer stability and capital preservation, making them an essential component of a diversified portfolio. While other investment instruments may be subject to market volatility, fixed deposits provide a predictable and guaranteed return. 

 

They act as a cushion during market downturns, helping to preserve capital and maintain a steady income stream. This stability is particularly valuable during uncertain economic conditions when preserving wealth becomes a priority. 

 

Risk Mitigation 

Fixed deposits play a crucial role in mitigating risk in a portfolio. They act as a low-risk anchor, offsetting the volatility of higher-risk investments such as stocks or mutual funds. 

 

By allocating a portion of your portfolio to fixed deposits, you create a balance between risk and reward. During times of market turbulence, fixed deposits provide a stable source of income, reducing the overall risk exposure of your portfolio. 

 

Example: 

Let's say you have invested in stocks and mutual funds, which are subject to market fluctuations. If the stock market experiences a downturn, the value of your investments may decline. However, if you have also allocated a portion of your portfolio to fixed deposits, you can rely on the steady income generated by these deposits to offset any losses from your other investments. 

 

Income Generation and Cash Flow Management 

Fixed deposits generate regular income in the form of interest payments. This income can be valuable for managing cash flow needs or providing a steady income stream during retirement. 

 

By including fixed deposits in your portfolio, you ensure a reliable source of income that is not dependent on market conditions. This income stability contributes to financial security and allows you to meet your financial obligations without relying solely on potentially volatile investments. 

 

Example: 

Let's consider an example where you have retired and are relying on investment returns for your monthly expenses. With a diversified portfolio that includes non-cumulative fixed deposits, you can count on the regular interest payments from these deposits to cover your living costs.

 

For the unversed, non-cumulative FDs offer periodic interest payments – monthly, quarterly or annually. You have the option to choose between cumulative (interest paid at maturity) or non-cumulative FDs. 

 

Liquidity and Emergency Funds 

Fixed deposits offer a high level of liquidity, allowing you to access your funds when needed. While they have a predetermined tenure, many banks provide the option of premature withdrawal with some penalties. This liquidity feature is advantageous in emergencies or unexpected expenses. 

 

By having a portion of your portfolio in fixed deposits, you create a safety net of readily accessible funds, providing peace of mind and reducing the need for selling other investments at unfavourable times. 

 

Example: 

Imagine you encounter a medical emergency that requires immediate funds. Having a fixed deposit that allows premature withdrawal enables you to access the required money without affecting your other investments. This flexibility provided by fixed deposits ensures that you have access to liquid funds when unforeseen circumstances arise. 

 

Complementary to Other Investments 

Fixed deposits complement other investment instruments in your portfolio. By combining fixed deposits with higher-risk investments, such as stocks or real estate, you create a balanced mix that balances potential returns with stability. 

 

Fixed deposits provide a foundation of security and consistent income, while other investments offer growth and capital appreciation potential. This combination allows you to capture the benefits of different investment strategies, hedging against risk while maximising returns. 

 

Example: 

Suppose you have invested in mutual funds for long-term growth but want to ensure stability in your portfolio. By including fixed deposits alongside your mutual fund investments, you can offset any potential losses during market downturns while still benefiting from the potential returns offered by stocks. 

Final Thoughts

Fixed deposits are essential for achieving a well-balanced and resilient investment strategy. By including fixed deposits, you reduce risk, ensure stability and capital preservation, generate regular income, manage cash flow, and maintain liquidity. The inclusion of fixed deposits complements other investments, providing a solid foundation for long-term financial success. 

 

Looking to grow your savings faster? Ujjivan SFB offers a wide range of fixed deposit products. Select the FD of your choice and take a step forward to your financial goals. Alternatively, you can browse through Ujjivan SFB product suite - our wide range of financial products are designed to make your financial life better. 

 

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FAQs

1. How do fixed deposits help in diversifying my investment portfolio?

Fixed deposits offer stability and predictable returns, which can balance out the volatility of other investments in your portfolio. By including fixed deposits in your portfolio, you reduce risk and ensure a more balanced investment strategy. 

2. Can I withdraw my money from a fixed deposit before the maturity date?

Yes, banks offer the option of premature withdrawal from fixed deposits; however, this may come with some penalties or reduced interest rates. It's important to check the terms and conditions of your specific fixed deposit before making an early withdrawal. Ujjivan SFB does not charge any premature withdrawal fee for withdrawals made after 6 months from the time of deposit. 

3. How do I calculate the interest on my fixed deposits for diversification?

The interest on a fixed deposit is usually calculated using a formula that takes into account the principal amount, the interest rate, and the tenure. You can use an online fixed deposit calculator or consult with your bank to get an accurate calculation of your interest earnings. 

4. Are fixed deposits suitable for short-term or long-term financial goals?

Fixed deposits can be suitable for both short-term and long-term financial goals, depending on your specific needs. For short-term goals where you require liquidity and stability, a shorter tenure fixed deposit may be more appropriate. For long-term goals where you want to preserve capital and generate regular income, a longer-tenure fixed deposit can be beneficial. 

5. Can I invest in fixed deposits with Ujjivan SFB?

Yes, Ujjivan SFB offers a range fixed deposit options that you can explore to diversify your investment portfolio. Visit the website to learn more about the fixed deposit offerings and start your journey towards a diversified portfolio. 

6. What is the minimum amount required to invest in a fixed deposit?

The minimum amount required to invest in a fixed deposit varies depending on the bank or financial institution. It can range from as low as ₹1,000 to higher amounts. 

7. Are the interest rates on fixed deposits fixed for the entire tenure?

Yes, the interest rates on fixed deposits are usually fixed for the entire tenure. 

8. Can I avail of a loan using my fixed deposit as collateral?

Yes, many banks offer loans against fixed deposits as collateral. These loans allow you to access funds while keeping your fixed deposit intact. The loan amount is typically a percentage of the value of your fixed deposit. 

9. Are the interest earnings from fixed deposits taxable?

Yes, interest earnings from fixed deposits are taxable according to India's income tax laws. The interest income is added to your total income and taxed according to the applicable income tax slab rates. 

10. Can I open multiple fixed deposits with different tenures and interest rates?

Yes, you can open multiple fixed deposits with different tenures and interest rates. This flexibility allows you to customise your investment portfolio based on your financial goals and requirements. 

11. Are fixed deposits guaranteed by the government?

Yes, fixed deposits are guaranteed by the government. Most banks in India are governed by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which provides insurance coverage up to ₹5 lakhs per depositor per bank in case of bank failure. 

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