All you need to know before investing in a fixed deposit

Choosing the right financial instrument for investment is crucial but also daunting. Given the plethora of investment options in the market today, it has become increasingly difficult to be abreast with all the pros and cons of the trending financial instruments. While we know the key features of popular instruments, it is important to understand them in detail, analysing both the pros and cons before making the final decision. 

Fixed deposit is one of the safest and most popular investment plans for your future. Fixed deposits have maintained their popularity over the decades as they designed to provide you maximum returns at a minimal risk.

Fixed deposit simply means a sum of money deposited for a specific duration. You can opt for a fixed deposit either through banks or non-banking financial institutions. Fixed deposits with NBFCs can fetch you a higher rate of interest every year, making it more appealing than a regular fixed deposit in a bank. For example, Bajaj Fiserv Fixed Deposit offers an interest rate of 8.60%, which can go up to 8.95% for senior citizens for tenures ranging from 12 to 60 months. Many financial organisations provide higher rates of interest for senior citizens, depending upon the terms of the policy.

That said, like any other investment options, FDs have both advantages and disadvantages. To help you decide if a fixed deposit is right for you, here are some advantages and disadvantages of putting money into a fixed deposit:

Let’s list all the advantages first

Safe returns: FDs are one of the safest ways of investing your money for the long haul with assured returns. When juxtaposed with other instruments like stocks, mutual funds and debt funds, FD is the clear winner as the others are affected by the market volatility unlike FDs. The fact that they provide guaranteed returns on your investments make FDs a great choice for investors who have a limited amount of money to invest.

Flexible tenure: Unlike PPFs, you have the choice to determine the tenure of your FDs. It comes with a minimum tenure of six months and a maximum of five years. This ensures that you safeguard your money and gain reasonable returns on it. There is also the option of opening multiple fixed deposits with different tenors to suit your financial goals.

Instant loans: During times of a financial emergency, your FD amount can act as the collateral and help you avail instant loans. You don’t have to prematurely break your deposit in order to finance your pressing needs. The maximum amount of loan is generally a certain percentage of the principal deposit.This varies across financial institutions. For example, on Finserv MARKETS, you can avail of a loan up to 60% of the amount invested in non-cumulative fixed deposits and 75% of the amount invested in cumulative deposits.

Flexible payouts: FDs allow you to select the term, and when the interest is credited to your FD account. You can choose between annual, monthly, or at-maturity payouts. Bajaj Finserv FDs also offer higher interest rates of 8.95 % for senior citizens.

Tax benefits: Fixed deposits also give you tax benefits while filing your returns. You can claim a tax benefit of up to Rs 1.5 lakh in a tax-saving fixed deposit account under Section 80 C of the Income Tax Act. The tax-saving fixed deposit has a lock-in period of a minimum of five years.

Forecasting your returns: You can also avail the benefit of instantly calculating returns on your FDs through an online interest calculator. You can easily use this simple and convenient tool by providing the amount to be deposited, the deposit term and the interest rate being offered. On Finserv MARKETS, you can use the Bajaj Finserv Fixed Deposit online calculator to evaluate your returns before investing.

These were the benefits of investing in fixed deposits which have made FDs an attractive investing option through generations. However, when compared with various other financial instruments in the market, FD schemes also have a few areas of concerns. Let’s discuss them in a nutshell:

Lower returns: Fixed deposits give you assured returns, though not necessarily high. When compared to other short-term market-linked investments, FDs fetch lower returns but you do not run the risk of losing out on your capital due to prevailing market conditions. Hence, FDs are increasingly popular among investors with a low risk appetite.

Liquidity concerns: Though you can always avail a loan against the FD amount during times of a financial emergency, breaking your fixed deposit scheme before the completion of its tenure might cost you a small penalty charge. You may also get a lower interest on the total investment when you break your FD.

Lower tax returns: The interest earned through your FD 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%. For senior citizens, this minimum amount has been raised to Rs.50,000. To increase your tax benefits from FDs, go with tax-saver FDs. Remember though that if you open a joint account, only the first holder of the deposit can avail the tax benefit as per Section 80C of the Income Tax Act.

Unaffected by inflation: When the inflation rate in the economy is on the rise and is higher than the interest rate of your FD, the returns availed from your fixed deposits become less attractive as your purchasing power will decrease.

So, these were the pros and cons of investing in a fixed deposit scheme. As you can see, the pros appear to outweigh the cons and it is evident that fixed deposits are the best bet for investors who want a safety net for their future, something that gives them the comfort of assurance. Fixed deposits are a prudent retirement plan for people with a limited amount of money to invest.

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