Decoding Financial Institutions’ Credit Ratings & Its Role in Fixed Deposit Investments

Posted on Tuesday, February 13th, 2024 | By IndusInd Bank

When it comes to saving money, many in India turn to fixed deposits for their predictability and safety. The Reserve Bank of India’s 2023 report highlights an impressive ₹10.27 trillion committed to bank deposits. This figure speaks volumes about the trust Indians place in FDs.

An FD typically offers risk-free returns as it remains unaffected by market volatility. However, it’s crucial to look at the bank’s reputation and credibility where you plan to invest. This is where the role of credit ratings comes into play. They provide a snapshot of a bank’s health, helping you decide where to entrust your hard-earned money.

What are Credit Ratings?

Credit ratings are assessments made by agencies to evaluate the creditworthiness of issuers of debt instruments, like fixed deposits. These rates reflect their credibility in the market and the likelihood of the institution defaulting on its financial obligations. Credit rating agencies such as CARE Ratings, CRISIL, ICRA, and India Ratings and Research assign these ratings after a thorough analysis of:

• Timely payments
• Default payments
• Business expansion check
• Debt repayment history
• Liquidity management
• Customer service
• Management team and business method
• FD market and competition

After the credit rating is assigned, you can use it to gauge the safety and risk associated with the specific fixed deposit. A higher credit rating usually means a safer fixed deposit financier.

The Role of Credit Ratings in Fixed Deposit Investments

Credit ratings play a crucial role in fixed deposits and significantly influence their security. Banks with higher credit ratings, like AAA, are considered the most reliable. They demonstrate a strong capacity to meet financial commitments. For instance, a bank rated AAA suggests the highest degree of safety for timely servicing of financial obligations, carrying the lowest credit risk. It means you have a high chance of getting your FD money back with interest upon maturity.

A lower credit rating indicates higher risks. Investing in such banks could put your principal amount at risk. They might offer higher interest rates to compensate, but the risk of default is greater. As an investor, you must weigh these factors.

Additional Tactical Approaches to Amplify Your FD Returns

While credit ratings hold significant importance, there are additional strategies to maximise your fixed deposit returns.

1. Open a tax-saving FD

A tax-saving FD usually comes with a lock-in period of five years and offers tax benefits under Section 80C of the Income Tax Act. While they provide tax relief, note that the interest earned is taxable. Only the invested principal amount is eligible for a deduction of up to ₹1.5 lakh in the year of investment.

2. Opt for cumulative deposits

In a cumulative deposit, interest compounds over time, which means you benefit from a larger corpus at the end of your FD term. This strategy works well for those who do not require periodic interest payouts and can lock their funds for a longer duration.

3. Ladder your investments

FD laddering means dividing your total investment into multiple fixed deposits with different maturity dates. For example, if you have ₹5,00,000, instead of one FD, you create five ₹1,00,000 FDs with maturity periods of 1, 2, 3, 4, and 5 years. This strategy provides regular access to some of your funds, reduces the risk of interest rate fluctuations, and ensures a steady flow of income as each FD matures at a different time.

4. Choose high FD interest rates

The mathematics is simple – the higher the interest rate, the more your returns. For your convenience, IndusInd Bank offers a combination of safe FD returns and flexible tenure options to achieve your financial objectives. You get to enjoy best-in-class FD interest rates and substantial growth in your investment over time.

Parting Thought

Credit ratings offer a clear picture of the stability and reliability of financial institutions. This information helps you select the right fixed deposit investment for your financial portfolio and maximise its value.

To get the best fixed deposit experience, you can consider IndusInd Bank. Enjoy high FD interest rates along with features like a 100% digital process, flexible tenure, fixed returns, and easy access through flexible interest payout options. 

So, choose wisely, invest smartly, and let your money grow with stability. Book your fixed deposit with IndusInd Bank NOW!

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.