Is Fixed Deposit A Thing of The Past?

Investing money in fixed deposits and earning interest from it is not the thing of the past. We all have heard our parents discussing investing their money in fixed deposits and must have seen getting it matured over time. Even though this investment option is there in the financial market for a long, some of us still do not know much about the pros and cons of a fixed deposit investment.

In addition to this, with the rising rate of interest in liquid mutual funds, the demand for fixed-income investments like FDs is going down. However, FD interest rates are the only thing that makes a fixed deposit the safest investment option? Let us read to know more about this investment option:

What is a Fixed Deposit?

To begin with, it is necessary to know the meaning of fixed deposit. Fixed Deposits are financial instruments that are offered by banks and some non-banking financial companies. In FD you can invest some money for a fixed tenure and earn a pre-defined rate of interest on it. As compared to other financial instruments, a fixed deposit is considered as one of the safest options as the FD interest rates by the banks and NBFCs is fixed and you get guaranteed returns upon maturity. The features of a fixed deposit are as follows:

  • The corporates and banks both can issue fixed deposits.
  • With FD you get a fixed interest rate.
  • The FD interest rate varies with its tenure that you select. For example, an HDFC Bank FD rate for tenure of one to two years is 4.90% whereas for a tenure of more than two years to three years it is 5.15%. So, the rate of interest increases with time and vice-versa.
  • It is one of the safest investment options than all the other investment instruments available in the market.

At the time of investment in fixed deposit, you must remember that the rate of interest on the principal amount is paid quarterly or monthly basis.

Types of Fixed Deposits:

Indian banks offer different types of fixed deposits with specific tenure and FD rates of interest. The first type of fixed deposit offered by most of the banks is 'Standard Fixed Deposit'. It is the simplest type of fixed deposit wherein the interest rate and tenure of FD are fixed.

The second type of fixed deposit is ‘Cumulative Fixed Deposit’ wherein the rate of interest is not paid every month instead it is paid at the time of maturity.

The third-type of fixed deposit that almost all the banks offer is ‘Flexi Fixed Deposit’ which enables you to withdraw a part of the sum of your deposit whereas the interest is accrued on the rest of the principal amount.

One of the most popular types of fixed deposit is ‘Tax Saving Fixed Deposit’. This fixed deposit has a lock-in period of three years and more during which you are not allowed to withdraw money. In this type of fixed deposit, you can claim tax exemption under section 80C of the Income Tax Act. However, you must always remember that the interest that you gain from a fixed deposit is always taxable.

Advantages of Including Fixed Deposit in Your Investment Portfolio:

The FD interest rates are fixed and decreasing as well, so the new generation thinks it a thing of the past and hence they do not prefer it. However, the rate of interest should not be the only factor to decide whether any investment option is good or not. There are many advantages that you get when you include a fixed deposit in your investment portfolio and the primary one is – its rate of interest is not affected by the market and hence does not fluctuate with financial market fluctuation. Your bank will provide you the same interest rate on your FD that it has promised to pay at the time of deposit. Hence, a fixed deposit is considered one of the safest investment options, and you get guaranteed returns upon maturity.

Apart from this, some other benefits of including fixed deposit in your investment portfolio with other investment options are:

  • Option to take Loan: You can take a loan against your fixed deposit at a lower interest rate. Generally, a bank in which you have opened a fixed deposit account allows you to take a loan between 70% - 90% of the principal amount of the deposit.
  • Tax Benefits: As compared to mutual funds, FDs provide the option of tax saving. The Indian government provides benefits of tax exemption for ‘Tax Saving Fixed Deposits’ which have a lock-in period of three years or more.
  • Regular Pay-Outs of Interest: The interest is paid out on regular basis. As an investor of FD, you can choose monthly or quarterly pay-outs. Additionally, you can reinvest as per your choice.
  • Good Return Rate:FD interest rates offered by most of the Indian banks are 4.9% for deposits having tenure between one to two years. Moreover, senior citizens are given a 0.25% to 0.50% additional rate of interest.

Disadvantages of Fixed Deposits:

While fixed deposits can be one of the investment instruments in your investment portfolio, it has some disadvantages as well, which are:

  • Tax on Interest Accrued on FD: The interest that you earn on your fixed deposit is considered as your income and hence it is taxable.
  • Lower Rate of Interest: Even though fixed deposits are one of the lowest investment assets, but they are also less dynamic. FD interest rates are fixed by the banks and hence they do not go up even when the market performs well.
  • Low Liquidity: You cannot withdraw all the fixed deposits at any time. For example, tax-saving fixed deposits cannot be withdrawn before the completion of its lock-in period. However, other FDs can be withdrawn prematurely, but in that case, a lower rate of interest is offered.

The Bottom Line!

Despite the disadvantages of a fixed deposit, you can consider it as one of the options to diversify your investment portfolio. In addition to this, it provides guaranteed returns after a fixed period.

Written By: PolicyBazaar - Updated: 15 February 2021
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