In India where people prefer saving money, a fixed deposit is considered one of the safest ways of investment for a long. The reason for preferring FD as an investment instrument is its guarantee of providing returns.
However, because of the falling rate of interest on FD and day-to-day increasing awareness towards other investment instruments, equities are a better option to invest your money in the long term.
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Most of the investors of the new generation opt for investing in market-linked products such as mutual funds. Even though it is a great move, but that does not mean Fixed Deposits cannot be or should not be part of your investment portfolio.
FDs are a good addition to your investment portfolio and here we are discussing why:
One of the best ways to create wealth is the asset allocation. There are various asset classes like equity, gold, fixed deposits, etc., and all of these play different roles in your investment portfolio.
On one hand, where mutual funds provide growth potential to your money over the long term, the other hand, fixed income options like Fixed Deposit bring stability to your portfolio as they offer guaranteed returns.
If your investment portfolio has the right diversification across different asset classes, which includes FD, it makes sure that the swing in your investment returns is kept to the minimum and you get a stress-free investment experience.
Fixed Deposits ensure guaranteed returns upon their maturity. Therefore, in case you have some financial goals that may not wait and to achieve that you require a certain amount within a predefined time frame, then you must include fixed deposits in your investment portfolio.
For instance, let us imagine that you require Rs.2 Lakhs for the admission of your kid’s school after two years. In this case, you know the exact amount that you need after a fixed tenure. Now, in this case, a fixed deposit is the best investment option for you.
Therefore, by looking at the rate of interest on FD and the tenure, you can accordingly deposit your money. This way, you will be able to fulfill your goal in the tenure you want.
When you invest your money in a fixed deposit, you already know the amount that you will get at the time of its maturity. Despite the performance of the economy and the downfall in the rate of interest, you will get the returns as per the interest rate that was agreed upon at the time of the FD deposit.
This feature of a fixed deposit helps you to plan your expenditure as you know the amount of money that you will get after a fixed tenure.
Fixed Deposits provide you an option to choose between non-cumulative and cumulative interest rates. This means that you can decide when you want to get the interest gains. If you are dependent on the income through interest for paying your bills and EMIs, then you can opt for quarterly and monthly pay-outs, and, you can opt for non-cumulative FD.
Alternatively, you may want to keep your savings, gained through fixed deposit, locked up until the FD tenure ends. So, by opting for the cumulative term, you can get the compounded interest at the maturity of your FD.
The interest gained is compounded and is paid with the principal amount at the time of maturity.
The interest gained is paid annually, semi-annually, quarterly, or monthly pay-outs.
This FD type is recommended to those who do not anticipate the requirement of funds until the FD tenure ends.
This FD type is recommended to those who want regular pay-outs like senior citizens.
Cumulative FDs provide higher returns than non-cumulative fixed deposits.
These FDs provide a lower amount upon maturity of FD as compared to cumulative fixed deposits.
Note: Both these schemes are governed by the same laws for tax and provide the same tax benefits.
If you need a financial emergency, you can easily withdraw your fixed deposits before its tenure gets over. In this case, you may have to pay a certain penalty, but the withdrawal before maturity or premature withdrawal is simple.
This flexibility enables you to get your money at the time of need or if some financial crisis knocks. An FD is one of the secure investments and with the flexibility it also provides attractive returns.
You can take a loan against your fixed deposit whenever you require funds. Generally, the banks sanction up to 70% of the FD amount as a loan against it. Even the rate of interest on loan against FD is also competitive.
The financial goals that you want to achieve within one to three years of your investment are considered as short-term goals. The main objective of these goals is to preserve the principal amount and as well as earn a little interest at the same time. Therefore, FDs are considered the best option for fulfilling such kind of investment goals.
For example, you have to go on a family vacation next year or you want to gift your mother some expensive gift on her 60th birthday that is next year, fixed deposits are considered as the best investment for achieving such goals.
Since you already have an idea of the cost of your trip or the cost of the gift that you want to give to your mother, hence accordingly you can make the investments by looking at the rate of interest on FD. For example, SBI Bank FD rates for a tenure of one year is 4.90%.
It must be clear to you by now that FDs can be a good option for your investment portfolio. However, you have to remember that FDs are the best for short-term goals.