Bank Fixed Deposits have been the best option for our parents and their ancestors when it comes to retirement or savings for the future.
Over time, there have been various modifications in fixed deposit (FD) as an investment option, in terms of accessibility to customers.
Here is a detailed analysis of the pros and cons of fixed deposit.
While the interest may not be higher when compared to equity mutual funds or investments in the stock market, bank FDs give comfort in terms of low risk compared to other market-linked investment options and guarantee capital returns at maturity.
Here are a few benefits of fixed deposits.
Interest payouts can be fixed on a monthly, quarterly or annual basis based on the needs of the consumer. Alternatively, it can be renewed at maturity along with the principal amount to be continued as FD.
There are tax-saving fixed deposits as well that are eligible under section 80C of the income tax act, It is one of the many investment options under 80C that collectively offer an option for income deduction of Rs 1.5 lakh. Tax-saving FDs have a lock-in period of 5 years.
As per the latest amendment in DICGC Act, an account holder can access up to Rs 5 lakh maximum as insurance within 90 days of a bank (excluding NBFCs) if it has been put under moratorium due to unusual closure of business.
Fixed Deposit interest earned by a senior citizen has an exemption limit up to Rs 50,000 on income earned. Interest rates are also higher for deposits for senior citizens.
One can avail loan against the FD and almost all the banks offer this service. The loan amount is based on the deposit value and tenure of the FD. However, do check with your bank about the rules around this facility. Interest on such a loan can also be as high as 10%.
Though fixed deposits are less volatile and come at minimum risks, it is not considered a top investment option as it has a few downsides.
Interest rates of FDs remain fixed for the tenure of the deposit. They are not dynamic in nature. So, if your FD gives you 5% interest but the inflation rate in the economy is 6%, you are probably receiving negative interest on your investment in the FD.
If you want to withdraw money before the tenure ends, you may be charged for pre-closure as a penalty, and the interest earned so far may also be deducted before crediting the principal amount.
In the case of customers aged below 60 years (other than senior citizens), the interest earned on FDs attracts TDS (tax deducted at source) of 10% if the interest earned is beyond Rs 40,000, though such an amount is adjusted from the filing of returns.
Generally, the interest rate on fixed deposits is fixed till the tenure of a particular fixed deposit. Hence, they can not enjoy the benefit of higher interest if there is an increase in interest rates in the market.
Fixed deposits have been popular predominantly for their guaranteed return of capital and easy liquidation. However, they are just low-risk investment options and not completely risk-free. As mentioned above, they do not help depositors counter higher inflation rates.
Hence, these were the pros and cons of fd.
Apart from focusing just on the pros and cons of a fixed deposit, estimating how much return it can generate for you is necessary too. You can give a try to an Online FD Calculator that can help you calculate what returns you can avail of if you invest an 'x' amount.
Also, whether one should invest in a bank FD should depend on two main factors.
One is the risk appetite of an individual. If he or she is highly conservative and interested in safeguarding the capital invested, then bank FDs are among such options.
Two, the choice of going for FD as an investment option should depend on the financial need. Bank FDs can be easily liquidated at any point in time and can come in handy in case of any financial emergencies.