Fixed Deposit is a wonderful path to build up your savings with the utmost security as an investment tool offered by banks and NBFCs (non-banking financial companies). FD is among the favoured approaches that allows you to deposit with your banker a lump sum amount and pick a tenure according to your preference. As compared to the returns provided by a standard savings account, FDs give better returns on the capital invested. The FD investment horizon may either be short-term or long-term, based on the investment strategy of a customer. The interest rates differ from one company or bank to another on fixed deposits. As mentioned above, banks, post offices and other non-banking financial entities offer fixed-deposit deposits. That being said, prior to depositing their money, investors must evaluate the interest rates, the company's credibility, and other considerations.
Meaning of prevailing interest rates
For an investor, the rate of interest depends significantly on the bank or NBFC providing the investment alternative. Different interest rates on deposits are given by each bank. In addition, the rate of return also relies on the investor's age. As compared to citizens under 60, senior citizen investors can expect better returns. Although interest rates differ on the basis of many factors, investors can reap good returns from FDs if compared to savings accounts.
Meaning of lock-in period on FDs
The maturity term is also considered as the lock-in period on a fixed deposit. Through this period, without financial consequences investors can not withdraw their deposits. Withdrawing the amount before the lock-in duration expires is specifically forbidden with tax-saving FDs. Premature withdrawal is acceptable for some types of FDs, but it relates to penalties. From one investment plan to another, the specific penalty conditions can vary. That being said, keeping deposits unchanged until maturity is often beneficial. Investors earn high returns when the term expires. Withdrawing prematurely will result in the FD's reduction of interest income.
5 Year FD Rates
|Banks||ROI in %|
|Equitas Small Finance Bank||6.75|
|AU Small Finance Bank||6.50|
Key pros of FDs
By investing in a fixed deposit investors can cherish the below given benefits:
- FDs offer assured returns on the invested sum, unlike most other investments.
- When it comes to the duration of the scheme, the best FD plans provide flexibility. Most financial institutions provide maturity tenures spanning from 7 days to 10 years, for instance which means that both short term and long-term investors can consider FD as a part of their personal finance.
- On fixed deposits under cumulative option the interest rates are compounded on a monthly, quarterly, or half-yearly basis.
- For non-cumulative fixed deposit plans, the investor can determine the frequency of the interest return. They can, thus, serve as an additional stream of income for creating wealth.
Cons of FDs
As the bank fixed deposits are mostly preferred by the risk averse investors, still there are some demerits of FDs which investors must take into consideration, and they are:
- If an investor is attempting to beat inflation then FD is not a good bet for him or her.
- For a prescribed period, a lump sum balance is locked-in. If you wish to make good returns from the savings, you should not use this money in case of an emergency. Premature withdrawals relate to penalties and other related charges.
- When an investor chooses to pursue a premature withdrawal from an FD, a part of their interest income from the scheme will end up being forfeited.
In compliance with the rules applied by the Income Tax Act, fixed deposit interest earnings in a year encounter TDS, or Tax Deducted at Source. Interest income is then added under the heading "Income from Other Sources" during Income Tax Returns. The TDS will then be measured against your overall tax liability by the IT Department. Interest earnings, nevertheless, is only withheld when interest income surpasses Rs. 40,000 from all streams. On the other side, if a person opts for a tax-saving FD, they can seek a tax deduction of up to Rs. 1.5 Lakh for the principal sum in a fiscal year.
Who and why should one consider FD?
While investing in market-linked securities to gain better returns, investors can be subjected to risks. Therefore, investors often need to pursue safer investment alternatives to ensure sustainable financial growth. Fixed deposits are stable and, as compared to riskier investments, contribute to assured returns. For new investors, fixed deposits are ideal savings vehicles. In addition, such schemes can significantly benefit risk-averse people. There is almost no chance of principal loss, as FDs give guaranteed returns. That being said, investors should note that, as opposed to other high-risk alternatives, the rate of return on such an investment is restricted.