A fixed deposit (FD) is one the best instruments you can include in your investment portfolio. It is reliable, secure, stable, and easy to get started with, even if you are a novice investor. Best of it all, it is a proven way to grow your wealth irrespective of market volatility.
You can lock your corpus for a specific period and get your interest earnings until your FD matures. One of the main benefits of investing in an FD is that you can earn generously thanks to the rate of interest applicable. This rate is higher than the rate offered on savings accounts, and a few other options.
The instrument is quite flexible as well, as you can choose between two payouts modes. While these are a few of the many advantages of opening an FD account, there are a few disadvantages too. As an investor, you should consider these as well to ensure you make a responsible decision.
To that end, here is a brief overview of the pros and cons of fixed deposit investments.
With attractive fixed deposit interest rates offered by many issuers, FDs have become popular financial instruments for investors across ages. It is a popular investment choice simply because it provides stability. Here’s how.
When discussing the FD advantages and disadvantages, an undisputed benefit is that senior citizens enjoy better rates with most issuers. If you are above the age of 60 years, most financial institutions will offer an enhanced interest rate between 0.25%-0.50% p.a., which is over the base rate on offer.
Opening an FD is an easy process and is available to anyone. Submit your KYC documents and open an FD with any bank or NBFC if you are an Indian national or an NRI. Check out the prevailing interest rates and choose an issuer who can give maximum interest earnings.
The interest earned on your FD is taxable. In case of senior citizens, the interest earned up to ₹50,000 for a particular financial year is non-taxable. However, you can claim tax exemption on investments up to ₹1.5 Lakhs as per the Section 80C of Income Tax Act, if you choose the right FD type.
When opting for a premature withdrawal facility, you can close the FD account even before it matures. During times of financial emergency, this option provides a great relief. However, be aware that you may have to pay a penalty. The penalty amount varies from one issuer to the other and usually ranges between 0.5% and 1%.
It is easy to open an FD with many financial institutions like post offices, NBFCs and banks offering it at a competitive interest rate. You can also book an FD online from the convenience of your home by visiting the issuer’s website or a reputed aggregator. One such option is Bajaj Markets, and you can use it to get personalised deals.
When discussing the pros and cons of fixed deposit, this is one of the most convenient features to consider. The renewal option in FD helps you grow wealth and build a profitable financial portfolio seamlessly.
Most issuers provide the auto-renewal option wherein your FD automatically is renewed again for the same tenor and at the same interest rate. If there is no immediate requirement for these funds, the renewal option is a smart choice to augment your wealth without needing any intervention on your end.
One of the main disadvantages of FDs is its lock-in period. When you invest your money for a specific period, you lose the flexibility of accessing those funds. With this lock-in period, you cannot withdraw funds as and when you need.
While it is true that returns on fixed deposits are independent of market fluctuations, high inflation scenarios can affect your earnings. In some cases, it may not combat inflation as well as market-linked avenues, and you may not generate profits.
While you can withdraw your investment before the FD matures, you may have to pay a penalty for the same. The issuer may charge a specific rate as penalty that can decrease your promised returns.
It is a hassle-free investment option providing assured returns
Reinvesting your FD can earn you interest not only on the principle amount but also on the interest earnings
Opt for monthly or quarterly payouts for helping you manage regular expenses
Flexible tenors to choose ranging from 7 days up to 10 years
When discussing the pros and cons of fixed deposit, one of the main limitations of FD is you cannot access the funds. Even if there is an emergency you may not be able to withdraw the money.
Considering the list of FD advantages and disadvantages, it is clear that it is a good option. It is reliable and safe for wealth generation. If you do not want to risk your savings by investing in mutual funds or shares, this is the best financial instrument for you.
The maximum amount varies from one issuer to another. Some NBFCs allow you to deposit up to ₹5 Crores. Some may even offer customised interest rates if you invest beyond ₹1 Crore.
There are no restrictions for opening an FD. It is open for all individuals including family trusts, Indian residents, NRI, HUF units, sole traders, associations and minors. In case of a minor, there should be a guardian for opening the FD account.
As per a rule laid down by the RBI, upon FD maturity, if you do not withdraw the amount, the unclaimed amount will earn a lesser rate of interest. So, it is ideal for you to either withdraw or renew the FD after the tenor ends.
The minimum amount varies from one issuer to the other. While some banks may allow you to book an FD with just ₹1,000, few other issuers may insist on a minimum amount of ₹10,000.