India's favorite financial instruments: FDs and LIC



If you ask your parents what their preferred investments were, fixed deposits will undoubtedly be among the top 5. So will LIC policies. Well, you can’t blame them. When they were at the peak of their careers, fixed deposits were both safe and rewarding. And LIC was the undisputed king of the insurance sector.

No wonder FDs and LIC were considered among the best places to invest money. To this day, despite the many other investment plans in India, FDs and LIC remain a hot favorite. In this chapter, we’ll take a good look at the interesting details about these investments.

Fixed deposits: An overview

During the early 1990s, fixed deposits offered up interest rates as high as 13%. Hard to believe, right? Especially considering how FD rates offered by most banks today fluctuate in the below 5% range.

Over the years, there have been three key turning points for FDs in India - during the years 1985, 1992 and 1997. They each brought their own new regulations to the table.

1985: When the ceiling on FD rates was removed

Conventionally, for deposits with tenures ranging between 15 days and a year, banks were free to set their FD rates. There was just one condition. The ceiling on FD rates for such deposits was set at 8% per annum. In 1985, however, this ceiling was removed.

1992: Deregulation of FDs, and the start of the golden years

In 1992, FDs underwent their first round of deregulation. Banks were no longer required to fix the interest rates based on the maturity of the fixed deposits. And that’s not all. They were also free to offer interest at rates up to 13% per annum, for FDs with tenures above 46 days. No wonder you parents loved FDs!

1997: Complete deregulation of FDs

In October of 1997, fixed deposits were completely deregulated. It was from this point that the RBI decided not to link bank rates with FD rates. Commercial banks were given the freedom to fix their own interest rates and determine the penalties on premature withdrawals. Today, this is pretty much how the scenario remains.

So, why are FDs among India’s favorite financial instruments anyway?

Ever wondered why FDs remain among the top investment options in India? Let’s check out some of the reasons India finds FDs so attractive.

  • Low risk: 

FDs offer guaranteed returns, and this reduces the risk associated with the investment greatly. 

  • Higher returns for seniors: 

Today, most banks generally offer a higher rate of interest on FDs for senior citizens. The difference may be nominal - often only a margin of 0.5% - but it’s an added benefit, nevertheless. 

  • Easy investment process

Investing in FDs is easy. It doesn’t involve a ton of research like some other investment options, such as real estate or equity. 

  • A range of useful features

Fixed deposits can also be customized. Investors can choose their deposit tenure. And premature withdrawals are also always permitted, except in the case of tax-saving FDs.


LIC: An overview

Life insurance as we know it today was a concept India borrowed from England. Oriental Life Insurance Company, set up by Europeans in Calcutta in 1818, was India’s first life insurance provider. But over a century later, in the 1950s, the Life Insurance Corporation of India (LIC) was created.

However, it was only much later that life insurance in India suddenly took centerstage. In 1995, LIC started an online drive for assisting policyholders and empowering agents through computers. And then, in 2000, the insurance sector was liberalized, thanks to the IRDA Bill.

Why are LIC policies among India’s favorite financial instruments?

Even as these developments continued on the one side, to the average Indian, LIC represents an iron-clad protection against emergencies. Here are some reasons LIC’s life insurance policies have been a favorite in India.

  • Low premiums:

LIC’s term plans offer a high life cover at low and affordable premiums.

  • Savings coupled with insurance:

The fact that all life insurance plans (except term insurance) offer both insurance and savings/investment components.

  • A wide range of options to choose from:

Earlier, life insurance was mostly just term plans and endowment plans. Now, the product offerings have evolved to include retirement plans, child plans, ULIPs and more.

Wrapping up: FD vs. LIC

Is the FD vs. LIC dilemma on your mind? Why not set aside a part of your income for both these options? After all, they are quite different in essence. An FD gives you guaranteed income if you need regular payouts, while LIC’s life insurance protects your family in case of any untoward happenings. And that not only resolves your FD vs. LIC question, but it’s also a win-win situation!

A quick recap

  • Over the years, there have been three key turning points for FDs in India.
  • Before 1985, the ceiling on FD rates for deposits with tenures from 15 days to 1 year was set at 8% per annum. In 1985, that ceiling was removed.
  • In 1992, following a deregulation, banks became free to offer interest at rates up to 13% per annum, for FDs with tenures above 46 days.
  • In 1997, bank rates and FD rates were delinked, and commercial banks were given the freedom to fix their own interest rates and determine the penalties on premature withdrawals.
  • Among the many reasons your parents prefer FDs are their low risk profile, the possibility of higher returns for seniors, the easy investment process and liquidity.
  • LIC is another favorite investment in India.
  • Its benefits include low premiums, savings coupled with insurance and a choice of plans.

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Yes, FDs can help you save tax. For this, there is a special kind of FD, known as tax-saver FD, that you will have to invest in. These FDs come with a lock-in period of 5 years, and they offer tax benefits up to Rs. 1.5 lakhs, under section 80C of the Income Tax Act, 1961.
That depends entirely on your life goals and your requirements. If you only want life insurance coverage, a term plan may be the best choice. If you want to save up for the long term, endowment plans may be what you’re looking for. ULIPs, on the other hand, help you invest and insure your future.
No, there is no specific upper limit on the amount you can invest in FDs. However, banks offer varying rates of interest based on the amount and the period of the deposit. So, make sure you check out the rates before investing, so you can optimize your returns.
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