Fixed deposits have always been a preferred investment option because of the high, assured returns that they offer. Especially when you compare the returns to other deposits, be it savings accounts or recurring deposits, it is easy to see how fixed deposit interest rates are more lucrative, and you can lose out by not investing in an FD.
FDs are one of the safest investment fund avenues for retirement as well as for your child’s education, marriage or any other sizeable expense that you may want to make. But as is the case with any investment, after considering the risk and benefits involved, you must decide wisely whether or not it is a good option for you.
So, look at the pros and cons of investing in an FD and make an informed decision.
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What are the advantages of a fixed deposit?
Here’s a lowdown on the pros of investing in a fixed deposit.
Fixed deposit returns do not fluctuate as compared to other investment avenues such as stocks, real estate or gold, whose performance is linked to the market. You can be assured that you will get fixed returns, in line with the rate that was decided upon at the time of taking an FD, irrespective of any fluctuations.
For instance, when you opt for a Fixed Deposit, not only can you benefit from a higher interest rate of 8.40% and an extra 0.25% on renewal, but since it has CRISIL and ICRA’s high stability ratings, you know that your money is going to be well looked after.
Fixed deposits are valid for a defined period of time, but, you can withdraw funds at any time by paying a small penalty. You might encounter a financial emergency or need extra funds for wedding or education expenses, and so, you can withdraw money from your FD account to meet such needs.
Fixed deposits are known for their flexibility with regards to the tenor. There is no lock-in period and you can stay invested for a term that you’re comfortable with, be it a few months or several years. For instance, if your son is in school right now, and you are planning for his higher education overseas, then you can invest in an FD for 5 years and use the amount on maturity to pay for it.
Another nifty feature is that you can use the FD as collateral and take a loan against it if you’re in dire need of funds. You can take a loan of up to 80–90% of the value of the FD, and pay interest that’s 1–2% higher than the interest that you were receiving on your deposit.
What are the disadvantages of a fixed deposit?
Let’s also look at the cons of investing in a fixed deposit:
Fixed interest rate
You will earn interest on a fixed rate basis, as FD interest rates don’t fluctuate with changes in market conditions. While this does offer a certain degree of assurance, the flip side is that when the fluctuations in the market are in your favour, you will still get the amount that was decided upon when you first started the FD.
The interest that you earn on your fixed deposit is taxable if your gains are greater than Rs.5,000 in one financial year. If you have a PAN and submit it to the financial institution, they will deduct TDS at the rate of 10%. If you don’t furnish your PAN, TDS will be deducted at a higher rate of 20%. However, if you are eligible, you can submit Form 15G/15H and ensure that TDS isn’t applicable to you.
As your money is deposited in an account for a fixed period of time, it is not available as cash that you can withdraw instantly from an ATM. So, it is fair to say that a fixed deposit offers lesser liquidity than a savings account. However, given all the benefits that an FD offers, this is a small hiccup. Also, if you plan smartly, you can create a separate cash reserve for such requirements, and invest the rest in an FD.
Now, that you understand the benefits and risks of investing your money in FDs, you can use an FD calculator to check the amount of maturity and return in advance, and then deposit money in an FD account.