Mumbai (Maharashtra) [India], June 22: Fixed deposit investments safeguard your money during volatility, and suits people who want higher returns but are risk averse. Being RBI insured, these are risk-free investments and offer higher interest rates than savings deposits.
However, investors are advised to shop around before making fixed deposit investments, as rates differ across banks. There are several reasons to open a fixed deposit. A major one being that they are immune to fluctuating market conditions and interest rates. However, with so many investment options available out there, how do you know when to invest in a fixed deposit?
In this article, we’ll evaluate the pros and cons to help you decide when it makes sense to invest in a fixed deposit.
Fixed Deposit Investment Advantages
The benefits of investing in FDs are numerous; let’s examine some of them.
* Higher interest rates than Savings Accounts: Fixed deposit investments earn a higher interest than savings accounts. So if you have a lot of money lying in your savings account, which you don’t plan to use in the next few years, it’s wise to put it in an FD. Senior citizens get a higher rate of interest.
* Tax benefits: As per Section 80C of the Income Tax Act, 1961, the principal amount in a Tax Saver FD is tax-free. Thus, FDs are a great tax-saving option for salaried individuals as well as business owners. However, the FD must be held for at least five years to qualify for tax exemption. Also, the maximum deposit limit is Rs 1.5 lakh for tax exemption.
* Risk-free: As you might already know, fixed deposit investments are risk-free and insured by the RBI up to Rs. 5,00,000. Additionally, no matter how the market is doing, the bank or financial institution where you made the deposit is legally bound to pay you interest at a fixed rate. Unlike investing in the stock market, your FD investment doesn’t lose money during a market downturn.
In addition to being risk-free, fixed deposit investments are insured by the RBI up to a limit of Rs. 5,00,000.
* Guaranteed returns: FD investments help you achieve short- and long-term financial goals. Since your interest earnings are guaranteed regardless of the market conditions, you will know exactly how much you’ll earn by the end of the investment tenure. This allows you to set clear financial goals for the future, such your child’s wedding or a down payment on a home loan.
* Flexible tenure: What also helps in financial planning is its flexibility in tenure; fixed deposit investments can have tenures ranging from one week to 10 years. This means, depending on your capacity and purpose, you can choose your tenure of FD investment. Moreover, longer tenures usually mean higher interest rates (see sub-section under Longer Tenures, Higher Rates).
For example, say you are 25 and plan to buy an apartment with a loan by the time you are 30, but you need a substantial down payment for that. You can invest in a fixed deposit for five years and apply for a loan when you have reached your financial target. For each goal, you can have a separate fixed deposit investment.
* Prevents overspending: By locking your money in a fixed deposit for a fixed period of time, you avoid touching it for unnecessary purchases. This allows your money to grow and earn more interest than letting it sit in a savings account.
* Access during emergency: A fixed deposit can be liquidated before its lock-in period ends. FD investments provide you with easy access to your funds in case of an emergency. A partial withdrawal facility can be extremely helpful during financial emergencies, such as unexpected hospitalisation. However, there is a small penalty charge for withdrawing your money.
* Credit facility: Fixed deposit investments also facilitate overdraft up to 90% of the principal amount. You can also get a premium credit card , such as the IDFC FIRST WOW! Credit Card, issued against your fixed deposit.
* Flexible interest payouts: In addition, the interest rates on FD investments and pay-out periods are both flexible. Interest can be paid at different intervals depending on the term you choose – payable either on maturity, quarterly or monthly. Plus, the interest rate on longer tenures is higher than on shorter tenures.
* It’s possible to transfer your FD investments from one branch to another within the same bank.
* Easy to renew: And finally, FDs can also be renewed automatically via internet banking; there is no need for a physical trip to the bank.
Fixed Deposit Investment Disadvantages
* A risk-proof investment has its costs, and these include lower interest rates than other investment opportunities. An FD account’s 8% interest rate may be higher than that of a savings account, but it is still below the average rate return from mutual funds (typically over 15%). Mutual funds are, however, riskier than fixed deposits and can generate negative returns in the face of economic downturn, such as a recession.
* In some cases, the offered interest rate can be lower than the rate of inflation.
* Also, FDs have a uniform interest rate for their complete tenure. This means even if the markets are doing well, your gains are fixed and not show an increase.
Longer Tenures, Higher Rates
As previously stated, opting for longer tenures can yield higher interest rates, as demonstrated by the rate chart of IDFC FIRST Bank below. The bank offers the best fixed deposit rates for both general investors and senior citizens, with the latter earning an additional 0.50% in interest.
Use the FD calculator to determine the maturity amount for a given principal amount and tenure.
FDs can be a useful tool for diversifying your investment portfolio, especially during market uncertainties, rising inflation, geopolitical concerns, as well as economic slowdowns. They help minimizing the risk associated with market fluctuations, offering steady returns while safeguarding your capital.
Not only does this strategy keep your funds safe in a risk-free environment, but it also allows you to earn a fixed higher interest rate compared to a savings account, leading to better returns. Additionally, tax saving fixed deposit investments can help you achieve your short-term and long-term objectives, while also providing tax benefits.
Since interest rates vary across banks, it is crucial to research all available options before making an FD investment. It’s worth noting that IDFC FIRST Bank offers the most competitive rates, and investors should take this into account when choosing a bank to invest in.