Find out which investment is beneficial for investors depositing idle funds!
When seeking low-risk investment options, both demand deposits (DDs) and fixed deposits (FDs) emerge as potential options. FDs are time-bound investments which offer higher interest rates compared to savings accounts, especially for longer tenors. DDs allow penalty-free withdrawals at any time, but offer lower interest rates compared to FDs.
However, discerning the nuances between these seemingly similar options becomes crucial for optimising returns and aligning with your financial goals.
Here are the major distinguishing factors between fixed deposits and demand deposits:
Particulars |
Fixed Deposits |
Demand Deposits |
Meaning |
Deposits are held for a predetermined tenor at a fixed interest rate |
Funds can be withdrawn at any time without prior notice |
Objective |
Suitable for long-term savings goals |
Ideal for short-term cash management needs. |
Interest Rates |
Tend to offer comparatively higher interest rates |
Offers lower interest rates in exchange for liquidity |
Tenor |
Can range from 7 day to 10 years |
No such requirements as deposits are available for regular use |
Types |
Regular FD, senior citizens FD, Tax saving FD, Corporate FD and more. |
Savings accounts, checking accounts, and money market accounts |
Taxation |
Tax saving FDs can help save taxes up to ₹1.5 Lakhs u/s 80C of the Income Tax Act, 1961 |
No taxes applicable on DDs |
Liquidity |
Low liquidity; premature withdrawal available, subject to penalties |
Highly liquid; no penalties or charges incurred for withdrawal |
Flexibility |
Low flexibility; certain FDs come with a lock-in period |
Highly flexible; funds can be added or withdrawn anytime |
In conclusion, selecting between a fixed deposit and demand deposit hinges on your financial goals and liquidity preferences. DDs offer easy access to funds but lower interest rates, while fixed deposits provide higher rates with limited access. Consider your objectives, risk tolerance, and liquidity requirements to make the best decision for your financial well-being.
Frequently Asked Questions
Which one offers higher interest rates, demand deposit or fixed deposit?
FDs offer higher interest rates than DDs, while the latter provides better access to liquidity without needing prior notice for fund withdrawal.
Can I convert a demand deposit into a fixed deposit?
Yes. Converting a demand deposit to a fixed deposit is often an option. While most banks allow this conversion, keep the following in mind:
Funds are inaccessible until the FD matures
Higher interest rates are offered on FDs
Fees and minimum amounts may apply
Which is more accessible: demand or fixed deposits?
Unlike FDs, DDs allow investors to withdraw money at any time without advance notice.
Which earns higher interest between FD and DD?
Fixed deposits generally offer higher rates, as your money is locked-in. Demand deposits have lower rates due to easy access.
Is it safe to keep large amounts in DDs?
Generally, yes. Most have deposit insurance coverage but confirm limits with your bank.
Which is better for long-term savings goals between fixed deposit and demand demand?
FDs provide better returns for long-term goals due to higher interest rates. However, consider your accessibility needs before choosing.
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