Looking to earn some more interest on the hard-earned and saved money that you manage to put away to save for the future?
Or buy that amazingly stunning car that you’ve been eyeing for a while.
Well, there is the conventional way of investing your money in fixed deposits and earn an interest of up to 7.5% depending on the bank that you chose. This option however, surely is no surprise.
All your money will be locked up in the bank for the tenure of the fixed deposit along with a fixed rate of interest. So, is this your best option? Absolutely not.
Here are 5 ways in which you can invest your money to earn a little more interest than you first set out to make –
- Compounding your interest
One way is by compounding interest. If you can reinvest interest payments earned on a bond, you can benefit from compounding interest. This means that you earn interest on both your original investment and on prior interest payments.
Over time, your total interest earned can be much higher if you can use compounding.
Assume, for example, that you own a Rs.1,000 corporate bond that pays 5%, or Rs.50, interest annually. If you reinvest the annual Rs.50 payment in a similar 5% bond, you would earn an additional Rs.2.50 at the end of the next year. You can use compounding to reinvest the Rs.52.50 total at 5% and accumulate even more interest. If you can reinvest your earnings, this strategy is an effective way to earn additional interest.
- Laddering Bond Maturities
Bond laddering allows you to reinvest the proceeds from bond maturities every few years. The bonds are laddered because they have different maturity dates. This strategy means that some bonds in the portfolio mature every few years. The proceeds from each maturing bond are reinvested at current interest rates. A portfolio that takes advantage of laddered maturities can reduce the interest rate risk on your investments. This refers to the risk that the value of an investment may change as interest rates change.
In an environment of increasing interest rates, the value of your bond portfolio will decline. Assume, for example, that you buy Rs.100,000 in corporate bonds. Every four years, Rs.20,000 reaches the maturity date and cash is repaid to you. In the third year, assume that interest rates start to increase. When the first Rs.20,000 matures in the fourth year, you can reinvest the proceeds at the new higher interest rates and earn more interest income.
- Online Savings Accounts
You may be able to increase the interest you earn by using an online savings account. Some financial institutions can offer higher rates because their cost structures are lower than traditional banks. The online business model does not require physical bank locations. Because these institutions have lower fixed costs, they can offer higher savings rates and lower minimum required balances.
- Other Banking Relationships
If you have a business relationship with a bank, it may be smart to negotiate a higher interest rate on your personal checking account or your personal savings account. Say, for example, that you’ve had a business loan at a bank for several years. Because you have an established history as a reliable customer, your banker will want to maintain a good relationship with you. Use that relationship to get a higher interest rate on your bank balances. If you have accounts at several different banks, a banker might offer a higher interest rate if your move all your balances into his bank. This is a strategy for the banker to gather more assets and build a relationship with you. Take advantage of this offer and combine your balances to earn a higher interest rate.
- Explore Mutual Funds
This is a simplified financial vehicle specially designed for the small investors. The average fixed deposit will lay out an interest of 7.5% per year whereas mutual funds have known to deliver more than 20% returns in a year. So, say you have Rs. 1,00,000 to invest, then you stand to make Rs. 20,000 by engaging in a mutual fund investment as opposed to Rs. 7,500 that you would stand to make through an FD. For example, HDFC mutual fund, efficiently managing 221,825 crores in assets, diversify your portfolio over an astonishing 890 funds.
- Mutual Fund Breakpoints
If you invest in mutual funds, you may pay sales charges for investing in each fund. If you buy a bond mutual fund, you can use a breakpoint to increase your interest earnings. A breakpoint is a quantity discount that you earn by purchasing a variety of mutual funds within the same fund family. If you make your purchases within the same family, you can earn a discount on any sales charges.
Following these tips can increase your earnings, generate higher returns and enjoy the extra money that you were missing out on.