Few financial goals are as emotionally weighty as funding a child’s education or marriage. The dates are roughly known, the costs tend to rise faster than expected, and there is little room for disappointment when the money is needed.
The fixed deposit is a dependable core of funds for such aims, and the challenge lies in deciding how long to lock the funds away and how much to devote to it.
Why is a fixed deposit suitable for long-horizon goals?
Goals with fixed dates call for money that is certain to be there on the day. Fixed deposits have features that suit this scenario closely.
- Predictable returns: An FD’s interest rate is locked in when booked, and therefore, predictable. It can also be computed before opening a deposit so that a plan uses a known value, not an opportunistic one.
- Built-in discipline: Since a deposit can be stolen from a savings account at any time for day-to-day expenses, it is much harder to touch the money in an FD that has a lock-in and is likely to attract a reduced rate if withdrawn before maturity.
- Trusted credit ratings: Since a goal for which funds must be available is non-negotiable, the safety of the issuer is as important as the rate. Bajaj Finance deposits carry credit ratings of the highest order from ICRA and CRISIL, providing confidence to parents who tie up money for several years.
How should the FD tenure be matched against the goal date?
Tenure is the most important variable in a goal-based choice of the deposit, for the goal must coincide with the FD’s maturity to avoid avoidable complications.
-
Work backwards from the date:
Start with the month when you need to pay, such as the fees instalment or a wedding, and book FDs with a tenure that ends just before the said month so that the maturity is in the account to clear bills instead of waiting until the next week.
-
Use a ladder for longer horizons:
An FD’s tenure ranges from 12 to 60 months with the finance company. If your child’s goal is 8 or 10 decades away, book a five-year deposit and plan its renewal separately. If the money is due to be used in stages, such as every year’s college fee, you can even open several deposits with varying tenures so that one reaches maturity each decade.
-
Review the rate at renewal:
The interest rate per new deposit booked reflects the rate in the month it is booked. Therefore, a renewal in several years’ time may earn a higher or lower rate than one in force today, and accordingly, it is judicious to plan for a possible differential when projecting long-horizon goals.
What amount should be devoted to an FD for the goal?
The decision to decide on an amount is partly arithmetic and partly an honesty of what one can sustain.
-
Estimate the future cost:
Since costs such as in education rise consistently with inflation, if a course today costs a known value, plan to have the amount exceed that figure by at least some time by the time for the child to enrol.
-
Test the figures with a calculator:
The apps include an FD calculator with which, given the deposit amount, rate and tenure, one can view the interest earned and the expected maturity value. Try a few combinations until the expected maturity figure matches your mind’s eye.
-
Split lump sums and regular savings:
If you have a lump sum available, one big FD would suffice. However, if surplus funds arrive routinely instead, you can open smaller deposits to add up. Either solution works, provided each deposit tracks a specific goal and date.
What options do you have should circumstances change?
Even well-planned goals fall foul of the occasional surprise, so it is good to be aware of the possible options.
-
Premature withdrawal norms:
To break an FD early may incur a loss by way of either a lowering of the applicable rate or a penalty, so understand the terms when booking so that an emergency is not encountered coldly.
-
Loan against your FD:
If one is to borrow funds from an FD without breaking it, especially as a source of working capital, a loan against the deposit would allow one to borrow while retaining the rate. This is handy for a college fee that falls due just a few weeks before the maturity of an FD.
-
An emergency fund:
The reserve for the child can serve as a contingency, but it is a good idea to keep separate reserves for medical or other emergencies so that it is not raided unnecessarily.
Conclusion
In planning an FD for a child’s education or marriage, it comes down to choosing the right tenure and the right amount to devote. Planning backwards from the date, utilising a tool such as multiple deposits for long horizons and testing the calculation against a tool such as the FD calculator will make the two choices much more accurate. Planning with a backup option in case of an emergency would also suffice well.
Bajaj Finance App makes the goal much easier and more secure by allowing the user to book and manage FD digitally, compare tenures, use the FD calculator to evaluate and even download the receipt and statements when required and achieve the desired goal confidently.