In India, Fixed Deposits (FDs) have emerged as the most preferred option to save the surplus funds, according to a SEBI survey conducted in 2017. The survey reports that more than 95% of households across urban and rural India prefer to park their surplus funds in Fixed Deposits. And with good reason. You can now think of fixed deposits as online investments that enable you to take control of your investments by clubbing stability with attractive returns. What’s more, you can choose from a range of tenures that suit your needs. To top it all, FDs offered at Finserv MARKETS provide a very easy process to invest in these instruments.
Usually, simple savings accounts and fixed deposits are both preferred on account of the stability and safety they provide. When people seek investments with high returns but don’t want to compromise on the stability and guarantee of such returns, they choose these avenues.
While both these modes of saving help you earn interest and ensure liquidity, there are a few remarkable differences between them. Knowledge of such differences can come in handy when you decide whether you want to invest in fixed deposits.
1) Rate of interest
In a savings account, you receive interest on your money as a reward for saving in the bank. In a fixed deposit, however, you are parking your funds with the sole aim to earn returns. There, you can earn a higher rate of interest, more than what you earn in a savings account. It can potentially be at par with inflation and thus help you attain better returns. Moreover, Finserv MARKETS offers fixed deposit rates for senior citizens that are as high as 0.35%, over and above the existing rates. Therefore, fixed deposits also provide much-needed financial support in the golden years of the post-retirement period.
2) No risks of market fluctuations
The rate of interest that you receive on your fixed deposits is not impacted by the market fluctuations. Most risk-averse investors invest in FDs for their stability and assured returns. Since your returns are unaffected by market forces, you can look for assured returns. In fact, with a guarantee of investment with high returns of interest rates up to 8.95% and, fixed deposits available on Finserv MARKETS are becoming more and more popular.
Savings accounts bring you interest rates that are already lower than FDs and are influenced by other economic forces.
3) Periodic interest payouts
Fixed deposits bring you periodic interest payments if you choose a non-cumulative FD. Such periodic payments can be useful in planning and catering to regular expenses. With a decent amount of interest, you can plan in such a way that you can pay all the bills through the interest amount alone. You can choose a non-cumulative FD and select the regularity with which you seek such returns – monthly, quarterly, semi-annual or annual payouts. Savings accounts, on the other hand, have no such disbursements.
4) An FD promotes the habit of savings
The fixed deposits are relatively less convenient when tested on the liquidity scale as compared to a savings account. In the latter, money is always readily available to be withdrawn and used as needed. Fixed Deposits come with a fixed lock-in period, such that you cannot make an unnecessary withdrawal of your money until maturity, without losing substantial returns in the process. FDs can, therefore, help foster a habit of saving your hard-earned money.
6) Inherent liquidity versus liquidity through laddering
As seen in the previous point, savings accounts come with liquidity as an inherent feature. The funds in a savings account are meant to be withdrawn and stay disposable for use. At the same time, savings accounts have very little variations to offer. On the other hand, an FD can be of many types to suit your individual needs. It could be Cumulative and or Non-Cumulative. In the case of Cumulative FDs, the interest is compounded every quarter or annually, and paid at the time of maturity. In a Non-Cumulative FD, interest is paid out periodically, as per your choice.
You can also choose flexible tenure as per your convenience. But because the tenure is fixed, your funds are stuck in an FD. One effective mechanism to get out of the rut is through what we call ‘laddering’. Under laddering, you shelve out your investments into multiple fixed deposit accounts to earn high returns while being welcomed with liquidity at regular intervals. Here’s how it works: you invest your funds in say, three fixed deposits for 3 lakhs, 2 lakhs and 1 lakh each, for varying periods from 5 years, 3 years and 1 year. At the time of renewal, after one year, if the rate of interest falls, you are protected against the reinvestment risk because the other FDs are still operating at the initially stipulated rate of interest. Alternatively if the rate increases, you are relieved that at least you have been able to secure one FD at the higher rate now. Thus, it protects you against loss of interest.
Thus, while savings accounts have their fundamental benefits – helping you make inroads into the financial and banking system, they can only perform the basic functions. If you want to be a prudent investor but are risk-averse, fixed deposits are the befitting next step. With fixed deposits available on Finserv MARKETS, even online investment can be done with a few clicks and minimal documentation!
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