For many, leaving the salary or income earned in a savings account seems to be the easy (for liquidity purposes) and risk-free option.
In most cases, the average return is close to 3.0-3.5% in a savings account. There are a few small finance banks that offer higher than average returns around 5%, but they require a much higher minimum balance requirement.
With the inflation rate at around 5.60% and gearing for an upside move, the average returns on your savings accounts won’t even beat the current inflation levels, let alone the rise in the future.
While savings accounts offer comfort and immediate liquidity, the returns from that are negligible. Whereas fixed deposits (FDs) offer slightly higher returns.
Factors for comparison: FD vs savings account
Higher rate of return
Investments in FDs enjoy a higher return as compared to what is offered by savings accounts. Interest rates offered by banks in India for 5-year FDs lie in the range of 7.00% per year to 9.50% per year. Senior citizens are given extra benefits, and the rate of interest offered to them is around 7.50% per year to 10.00% per year.
But a few banks, to push vaccination among citizens, offer additional basis points in the interest rates for fully or partially vaccinated individuals. For instance, the Central Bank of India offers additional 0.25% basis points on its FDs while UCO bank offers 0.30% on its FDs. These are above their standard FD rate.
Periodic interest payout
Fixed Deposits offer you the facility to avail an interest accumulated on your investments periodically. Non-cumulative FDs offer you monthly, quarterly, semi-annual and annual payouts, while cumulative FDs pay you the total interest earned by you during the tenure of the FD at the end of the maturity period. There is no such facility with savings accounts.
FDs help save more
No limits on withdrawals and anytime withdrawal facility as with savings accounts may lead to excessive spending, which defeats the ultimate goal of maximized savings. FDs have a lock-in period that discourages any untimely withdrawal from the invested sum. Since you cannot withdraw, you end up saving more. You benefit from compounding as the invested amount stays invested for long, earning interest on interest and growing into a corpus.
The facility of loan against FD
An emergency is called so because it strikes without warning. With fixed deposits, you can conveniently raise funds against those fixed deposits at a lower cost. You can either ask your bank to extend you a loan against your FD or issue an overdraft. Banks generally extend loans against FDs for up to 90% of the value of the fixed deposit.
When the ultimate aim is to maximize your wealth, picking the instrument (FDs) offering a higher rate of returns, when compared to a savings account, makes sense. This is provided there is the same stability of returns and lower risk.
But having said that, FDs too have lower returns when compared to other investment options. So it is important for investors to be clear on the goal of investments and its strategies before selecting an investment option.