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