Fixed deposits are one of the most traditional and popular savings options available in the market. Rightfully so, as it is one of the safest savings options when compared to stocks or any other market-linked investment schemes. FDs are a great way to kick start your savings journey. They are easy to understand and you can earn a fixed and stable income through FD returns.
Why Is Fixed Deposit a Low-Risk Savings Option?
Each savings option has some amount of risk associated with it but this level of risk varies for every investment scheme and so does the return capabilities. Investment options like equities and stocks might give you a higher return than fixed deposits but it has higher risks that involve market fluctuations and fluctuating stock indices. Any investment that is made has to be done keeping your financial goals and risk appetite in mind.
Some investors are ready to take greater risks for higher rewards whereas others prefer the security of stable savings options that carry lower risk. Investors who have a low-risk appetite can invest in bonds, PPFs, liquid funds or fixed deposits. While each of these options have their own features and benefits, FDs remain the go-to investment because of their low-risk nature.
Some additional benefits of investing in a fixed deposit are:
Assured returns: Savings made in FDs are unaffected by market volatility and they fetch guaranteed returns. You get the amount that was promised during the time of investment. It is best suited for risk-averse investors to park their funds to get interest more than that of a savings account.
Flexible Tenors: Fixed deposits allows you to choose a tenor that suits your needs. In case you do not want to lock in the investment for a long time, you can consider investing in a shorter tenor. Keep in mind that longer the tenor, higher the rate of interest and consequently, more returns.
Periodic payouts: Based on your financial objectives and goals, you can choose a payout period. In case you want the interest income to fund your recurring expenses, then you should opt for the non-cumulative FD. This will allow you to earn a regular income along with the final maturity amount. On the other hand, if you want to accumulate all the interest income and access this along with the maturity amount, you can choose a cumulative fixed deposit.
Higher rate of interest: Right now, most financial institutions have raised FD interest rates, therefore this is the right time to book an FD. Hence, investments are now made not only for a safe investment, needed to balance the portfolio but also to build a large corpus of returns.
Loan against fixed deposit facility: There may be emergency situations where you might require liquid funds. In such a case, you can address the situation by getting a loan against a fixed deposit without having to liquidate your fixed deposit. This way, you are prevented from prematurely withdrawing your fixed deposits and losing out on the interest.
Senior citizens benefit: The FD interest rate that is offered to senior citizens is usually higher than the interest rate offered to general citizens.
Tax-saving option: Under Section 80C of the IT Act, tax-saving FD investors can deduct tax of up to ₹1.5 Lakhs against the investments made. This makes tax-saving FDs a great savings option while helping you fetch assured returns. That being said, it is important to note that the tax-saving fixed deposit scheme comes with a compulsory lock-in period of five years and you are not allowed to withdraw the funds under any circumstance.
Encourages the habit of saving: FDs require you to keep the fund for a certain tenor to accumulate the required interest income. This way you will not be tempted to spend the money but instead find a way to manage your finances efficiently. This encourages the habit of savings.
Can be withdrawn easily: The amount that you have saved with a fixed deposit can be withdrawn anytime but doing so will attract a penalty.
One-time effort: FDs do not require you to keep track of the market in order to understand how your fixed deposit is performing. Additionally, there are no jargons involved when it comes to FDs. This makes it easy for someone who is investing for the first time to get the idea behind FDs.
Portfolio diversification: FDs help reduce overall portfolio risk. The key to creating wealth is asset allocation. Various asset classes like fixed income instruments, gold, equity, etc, play different roles in a portfolio. While stocks give your funds a growth potential over a long term, fixed income instruments such as FDs bring stability to the portfolio as their returns are assured. A portfolio that has a right mix of asset classes makes sure the swing in returns is kept to a minimum.
Meet short term goals: If you have a short term financial goal such as going on a trip, buying a bike, etc, FDs are a great way to fund them. This is because there is a surety of returns at the end of the tenor and you can plan your investments accordingly.
Nomination facility: Nomination facilities are provided by banks and NBFCs on fixed deposits. If the fixed deposit account holder has appointed a nominee, the bank or NBFC will transfer the FD amount to the nominee without any legal formalities or probate orders. This individual is also responsible for safeguarding the funds until the legal heir claims it.
If you are interested in booking a fixed deposit account, you should compare the different rates of interest that are offered by various NBFCs and banks. Apart from this, make sure to check the credibility and reputation of the financial institution while opening an FD account. Fixed deposits can now be purchased from the comfort of your home with just a few clicks. You can open the account online either by visiting the official website of the financial institution or through a third party aggregator website. This saves you from the hassle of a lengthy documentation process and waiting in queues.