Fixed Deposits —with their fixed tenure, reasonable interest
rates, and easy access—are one of the most convenient ways to kickstart
your investment portfolio.
But if you haven’t made up your mind, don’t worry. Let’s take a look at some of the FD (Fixed Deposit) advantages and disadvantages to help you with your decision.
Advantages of Fixed Deposit:
1. Safe Investment:
Unlike other high-risk investments like stocks, mutual funds, and debt funds, FD Interest rates aren’t dependent on fluctuating market rates.
2. Risk Factor:
An FD scheme comes with a minimum tenure of 6 months and a maximum of
5 years; this ensures that you safeguard your money and gain reasonable
returns on it. The recent RBI regulation has made it compulsory for
investors to draw up an insurance on FD investments. Each investor is
insured for upto Rs.1 lakh on the account, and this amount includes both
the principal and the interest accrued.
3. Loan & Credit Card:
Instead of pre-closing your FD and getting a penalty levied, when you
need instant cash, you can simply take a loan against your FD. You can
get a personal loan of up to 90% of the total FD value. Unlike other
unsecured personal loans, you get lower interest rates when you secure
your loan with your FD as collateral.
4. Flexible Interest Rate Payouts:
Depending on the term you choose, you’d gain interest at different
intervals. You can either go with annual, monthly, or at-maturity
alternatives, according to whatever suits your convenience. This cash
flow would ensure that you gain a periodic income and get to reinvest
that amount for other purposes. Some non-banking financial corporations
like Bajaj Finserv offer an additional interest rate for senior
citizens, up to 0.25% of the amount invested.
Disadvantages of Fixed Deposit:
1. Size of Returns:
Though an investment in FD gives you a guaranteed return, it’s still lower than other short term investments.
2. Liquidity:
If you want to withdraw money whenever you need it, a savings account
would be a better alternative. You’d be either charged a penalty if you
withdraw amount from an FD before it completes its maturity period, or
you might end up getting a lower interest rate on the amount.
For instance, when you invest in Bajaj Finserv’s Fixed Deposit, you
would have to keep a minimum tenure of 1 year and avoid withdrawing
within that period.
3. Tax Returns:
Interest earned through your Fixed Deposit won’t be tax-free; on the
contrary, it falls under the taxable slab of your income. If your
interest earned is higher than Rs.10,000, it will be deducted as TDS at
the rate of 10%. To avoid this, you can either open multiple FD accounts
in the same bank or in different banks.
To increase your tax benefits, you can go with Tax-saver Fixed
Deposits. If you open a joint account, only the first holder of the
deposit will get to avail the tax benefit as per the section 80C of the
Income Tax Act, 1961.
Now that you know the key features and drawbacks of investing in an FD, take a call. Research current market trends, Use Bajaj Finance FD Calculator to calculate interest rates or maturity amount and different rates across the market before you sign up for an FD.
A good investment strategy is based on choosing investment instruments that are a well-balanced mix of safe and risk. Fixed deposits (FDs) are a popular choice for a safe investment. To invest in a fixed deposit, a sum of money has to be deposited for a specific time period. The period can range from a few weeks to a few years, and the rate of interest is predetermined. Fixed deposits taken from banks are the safest method for this type of investment. There are private money management firms that offer fixed deposit investment options with a higher rate of interest than that given by banks.
Safety
One of the major advantages of fixed deposits as a form of investment is the safety factor. When the deposits are taken from a reputable bank, they provide a very safe investment, because banks are generally regulated by the Federal Reserve, which has supervisory and regulatory authority. Fixed deposits can also be taken from companies that offer this investment option. However, the safety factor is considerably lower, because if the company declares bankruptcy, people stand to lose their money. Companies that offer exceptionally high interest rates should be suspect until completely verified.
Guaranteed Returns
Fixed deposits, apart from being a safe investment instrument, also has the advantage of providing guaranteed returns. The money that is put into fixed deposits earns interest for the investor. The interest is paid every month, every quarter or half-yearly, depending on the bank’s policy. This type of investment is ideally suited for retired persons who need to have an assured source of income each month. The rate of return on the deposits is generally fixed at the time of taking the deposits. However, some banks do offer a floating rate option, and the interest rate is announced every quarter.
Liquidity
Investment in fixed deposits is advantageous in many ways, but it also has a downside. One negative aspect of these deposits is that they do not have high liquidity. Once the money is locked into a deposit with the bank, financial institution or company, the money stays locked in for the duration of the agreed deposit period. People will not find it easy to get their money out in an emergency. Banks and other institutions levy a penalty on deposits that are withdrawn prior to the maturity date.
Lower Rate of Return
The advantage of high safety in fixed deposits is also the basis of one of the major drawbacks of this type of investment. Because of the safety factor, banks in particular offer lower rates of return on fixed deposits. The main reason corporate fixed deposits earn a higher interest rate is that the money is not as safe as it would be in a bank. Most banks are regulated by the Federal Reserve and are not in any great danger of declaring bankruptcy. Investments in companies do not have this security, as they can go bankrupt at any time.
Savings is something that we are taught from a very young age and to do so we adopt several methods and measures. Some invest in mutual funds while others invest in gold or properties. There are also people who go the traditional way by saving money in different savings bank accounts. A few decades back, this method of saving money would have been enough but today, this is certainly not enough to get a comfortable life after retirement or fulfill other financial goals.
If you want to get better returns on savings, the first thing that you need to change is the way you have been saving your money. If you’re one of those people who are afraid to invest in stocks or cannot afford to invest in properties or gold, then you must consider investing in a fixed deposit.
What is a Fixed Deposit?
A fixed deposit (FD), also known as term deposit or time deposit, is one of the financial instruments offered by all banks across the nation. It is one of the safest investment options as it ensures fixed returns on the invested amount. When a person invests in a fixed deposit, his/her money gets locked for a fixed period of time and earns interest till it reaches maturity. The term or duration of a fixed deposit ranges from 7 days to 10 years. It is up to the investor whether he/she wants to invest money for a few months or a few years.
People who wish to invest money in a fixed deposit must be careful when choosing tenure for a fixed deposit. It is because the rate of interest for a fixed deposit depends on the tenure. The rate of interest also depends on the bank polices and may range from 4 percent to 9 percent. While a fixed deposit is known to have limited liquidity, that is compensated by its high rate of interest.
Moreover, investing in a fixed deposit gives you a lot of benefits. Read further to learn the benefits that you may get by investing in a fixed deposit.
Benefits of a Fixed Deposit
A fixed deposit is one of the oldest forms of investment options and offers a wide array of benefits to investors. Some of those benefits are mentioned as follows:
Since a fixed deposit has nothing to do with market rates, it is safe and promises guaranteed returns. The returns will only be dependent on the amount deposited, tenure of the FD and the rate of interest that is applicable as per the tenure.
A fixed deposit is known to be one of the safest investment options. Unlike other investment options such as stocks and debt funds, a fixed deposit is not dependent on the ever-changing market rates and thus involves no risk of losing money.
People who invest in fixed deposits, ideally, must not withdraw money before maturity. If they are in need of instant cash, instead of pre-closing their FD and bearing the penalty charges, they must take a loan against it. Fixed deposit investors can get a personal loan of up to 90% of the total FD amount but at a lower rate of interest.
Yet another important benefit of investing in a fixed deposit is that it helps you in saving income tax. As per section 80 C of Income tax act, 1961, investors investing in a tax-saving FD with a lock-in period of 5 years will get a tax benefit of maximum Rs 1, 50,000.
These are some of the benefits of investing in a fixed deposit. If you’re still unconvinced, read further to learn why investing your savings in a fixed deposit is more fruitful than storing it in a savings bank account.
Why is Investing in a Fixed Deposit Better Than Keeping Money in a Savings Account?
Many people think that storing money in a savings bank account is better than investing in a fixed deposit. What they don’t realise is that storing money in their bank account is not going to help them save money for their retirement plan or to reach other financial goals. Since money stored in a bank account is readily available, it will disappear before they know it. This is why it becomes even more important to invest in a fixed deposit where you have an option to lock in your money for a specific period. The list of benefits for a fixed deposit being a better option than a savings account does not end here. Read further to learn which one is more profitable for you.
Interest Rate
An interest rate is one of the important factors to consider when you’re confused whether to invest in a fixed deposit or keep it as is in your savings account. If we draw comparisons between a fixed deposit and a savings account’s interest rates, then a fixed deposit is undoubtedly a smarter alternative. The interest rates offered on a savings account ranges somewhere around 3% to 8.50%. Whereas for a fixed deposit, the interest rates approximately range from 3% to 9%. However, for senior citizens, a savings account offers better interest rates. Thus, it is better to check both the rates of your bank before you choose to apply for savings accounts over a fixed deposit scheme.
2. Returns with Respect to Term
Besides considering the rate of interest, investors must also analyse from where they receive more returns in the short term. In this case, a fixed deposit scores more points as it is a better option to meet short-term financial goals. Even if you invest for a few months in a fixed deposit, you will earn more than you would from your savings accounts.
3. Benefits of Compounding
Unlike a savings account, a fixed deposit has another advantage and that is of compounding frequency. Interest on a fixed deposit is compounded on quarterly, half-yearly or an annual basis. Let’s just say that you are locking in an amount of Rs 2,000 for 10 years at 10% rate of interest, which is compounded annually. At the end of the first year, the balance rises from Rs 2000 to Rs 2,200. And next year when you earn interest on Rs 2,200, your balance rises from 2,200 to Rs 2,420, and not Rs 2,400. This is how your money grows each year. The more the frequency of compounding, the better the returns will be.
4. Tax benefit
You don’t get a tax benefit from your savings accounts. But your fixed deposit, particularly when diversified, can offer you tax benefits. As per section 80 C of Income Tax Act, 1961, investors investing in a tax-saving fixed deposit with a lock-in period of 5 years will get a tax benefit of maximum Rs 1,50,000. Therefore, if you want to save on the tax, you can invest money in FD to avail a tax deduction.
5. Loan benefit
Another prominent benefit of a fixed deposit is that it gives you better security than a savings account. If you’re in a financial emergency and need cash urgently, you can take out a loan against fixed deposit. Banks usually give a personal loan of up to 90% of the total fixed deposit amount to fixed deposit investors. Although it is at a lower rate of interest, the investors get the loan instantly if they invest in a fixed deposit. There is no such provision for a savings account.
Final Words
People put their money in a bank account to earn interest. You can earn interest in both a savings account and a fixed deposit but your money grows more when locked in for a fixed tenure. While a savings account gives you no limit on the amount you deposit, no fixed tenure and better interest rates for senior citizens, a fixed deposit offers you a better rate of interest for all (except for senior citizens), compounding interest and loan and tax benefits. Therefore, if you ever have to decide between investment in a fixed deposit or keeping it in a savings account, then on the basis of the above comparisons it makes good financial sense to invest in a fixed deposit.
