How to earn AMAZING returns on your fixed deposit

Can't believe that your humble fixed deposit investment can ever give you a return of 23 per cent per annum? Well, you need some simple math, some smart jugglery and the numbers add up.

Every financial planner advices not to keep your money idle. The more you rotate your money, greater will be the return is a common refrain from this tribe. In fact, it is a good practice to use the invested fund in such a way that money is mobilised properly.

In this article, we would discuss a unique investment model to keep your money mobilised while maintaining proper liquidity and robust returns.
 
Understanding fixed deposit

Before proceeding further we must understand fixed deposits. Fixed deposit (FD) is a popular way of investing money. The prevailing interest rate for FD investment is around 10.5% per annum. It means that if we invest Rs 1 lakh in FD then every month we'll get an interest of Rs 875, which can be reinvested as FD or can be drawn for another purpose.

To invest in FD, we can either start a recurring deposit account (RD) or make a one-time investment.
 
Now the question is why to invest in FD when there are various other options available in the market? The answer can be found in the model that we are going to make on the base of investing in FDs.

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Amit Sethi is an MBA (Fin) graduate. He has spent 8 years in Equity research and Stock broking sector. He can be reached at amvilube@gmail.com

Investment model taking FD as a base

Before we proceed to steps of our model, we should understand why we have selected the humble FD. Following are the reasons:

• It's easy to operate
• The liquidity is greater than another investment product
• It eliminates the risk factor as there's surety of return
• The investment can be used as security with banks and other financial institutions if required

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Step 1. Investing in FD

Invest the money in a fixed deposit with a bank. We take a supposed investment of Rs 1 lakh per annum for a term period of two years at an interest rate of 10.5 per cent. Take the monthly interest credited back to operating account. Hence Rs 875 will be received every month.
 
Step 2. Investment in mutual fund

Invest the interest credited back from FD investment to a mutual fund SIP with equity-related schemes. This step will help in diversifying the investment to an extent of 10 per cent. Looking at the past performance of equity-related mutual fund, a return of 16-20 per cent per annum, can be expected. Hence if Rs 875 is invested through SIP for two years, then total amount invested would be Rs 21,000.

A return of 16 per cent per annum on Rs 21,000 would be Rs 6,720, so total amount at the end of two years would be Rs 27,720. Similarly, we can also opt for gold ETF SIP in place of equity-related mutual fund.

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Step 3. Take an overdraft with ASBA facility on FD

Request for an OD facility on the FD with the bank. Normally banks allow an OD facility of 90-95 per cent of FD amount. In addition, apply for the ASBA (application supported by blocked amount) facility on OD account.

The OD will provide liquidity in time of need without disturbing FD. Normally banks charge one per cent above FD interest rate for OD facility, that is, 10.75 + 1 = 11.75 per cent per annum.
 
Step 4. Using OD for IPO

Now with ASBA facility in OD account, it can be used for application in IPO, FPO and rights issues that are announced time to time in the stock market. Every year there are two to three very good IPOs/FPOs which give a good listing benefit.

For example, Coal India, Lovable Lingerie, Gravita India Ltd, etc. were some of the IPO, which gave a good listing and post listing benefit in last one year. While investing through ASBA interest is charged only on the amount which is utilised for share allotment during IPO.

• On an average, a return of 5 per cent can be easily earned on investment in IPO
• OD of Rs 95,000 (95 per cent of Rs 1 lakh) invested in IPO
• Return of 5 per cent on investment = Rs 4,750
• Interest on OD for 10 days @ 11.5 per cent = Rs 300
• Net return = Rs 4,750 - Rs 300 = Rs 4,450

Every year there are two to three very good IPOs. Even if OD is invested twice per year then in two years total return from IPO investment would be Rs 17,800 (Rs 4,450 8 4).

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Here's how you get a return of 22.8 per cent annually

If we'll calculate return in the above-mentioned steps then the return would be as follows:

• Step 1 = Interest of Rs 21,000 in two years
• Step 2 = Return from mutual fund = Rs 6,720
• Step 4 = Rs 17,800 by investing in only four IPO in two years
• Total return = Step 1 + Step 2 + Step 4 = 21,000 + 6,720 + 17,800 = Rs 45,520 in two years

Hence, an annualised return of 22.8 per cent can be achieved, which is very attractive looking at return of other financial instruments available in the market. This model not only reduces the risk factor but also maintains the liquidity without compromising with return.
 
In this model, we can also use LIC policy, post office investment or provident fund as base replacing FD before step 3 for creating an OD with the bank.

In this way, an idle investment can be properly mobilised to give better return.