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Fixed Deposit: Advantages And Disadvantages

By Staff
|

Conservative investors, most of the time, consider fixed deposit as safe instrument. But in this falling interest rate regime, one has to consider few other options like company fixed deposit, bonds, etc.

Here are few advantages and disadvantages one should know before locking into fixed deposits:

Fixed Deposit: Advantages And Disadvantages
 

Advantages:

Safe investment: returns on stocks, mutual funds and debt funds depend on the market unlike those of FDs, which makes FDs a much safer investment. Additionally, the fact that they offer guaranteed returns makes FDs an excellent choice for individuals with a limited amount of money to invest.

Fixed tenor: an FD regime is delivered with a minimum duration of 6 months and a maximum of 5 years. This ensures that you protect your money and get reasonable returns on it.

Loan against FD: when you are in a financial crisis situation, rather than breaking your FD and incurring a penalty, you can simply take out a loan against your FD, with a loan amount of up to 90% of the total value of FD. With the pre-approved offers from Bajaj Finserv, the use of loans becomes even easier.

Flexible interest rate payments: FDs allow you to select the duration and the time when interest is credited to your FD account. You can choose between annual, monthly or maturity payments. The FD also offers higher interest rates to the elderly. FD Bajaj Finserv, for example, offers an additional interest rate of up to 0.25% (higher than the current rate), for seniors.

Disadvantages

  • Not surprisingly, FD as an investment is less risky then this aspect is the reason why its returns are lower compared to other investment options.
  • Then there is an issue of liquidity, while your money is locked up with the bank, it is not easy to withdraw at a moment's notice.
  • In fact if you withdraw before the agreed duration, you will be penalised. Also, there is no tax benefit in this investment, unlike the infrastructure bonds or the National Savings Certificate (NSC).
  • So, even from a taxation point this is not the best of investment options.
  • Some banks charge as much as 1 per cent, if you beak the deposit early, which means you need to either make sure that you invest in multiple deposits of small amounts.

Also read: Understanding the tax implications on fixed deposits

 

Should you invest in a fixed deposit?

After weighing the advantages and disadvantages of fixed deposits, we would suggest you invest in them, if your risk appetite is very low. For example, if you have penchant for risk, it would be better to invest in other instruments like shares, debentures etc. This is because, they tend to offer you better returns than bank fixed deposits over a period of time.

On the other hand, if you are risk averse stay with fixed deposits as the advantages far outweigh the disadvantages.

Also, if you are over 50, your ability to take risk would be low. At such a time it is best to stay invested in fixed deposits. When we say fixed deposits, you can also look at some other instruments that yield fixed interest like the Public Provident Fund.

Also read: How much TDS is deducted on company fixed deposits?

We also are advising investors at the moment, when you look at fixed deposits, invest with a long term time frame. You benefit from compounding, where the maturity is higher over a period of say 48 to 60 months, as compared to 1 months.

GoodReturns.in

Read more about: fixed deposit interest rate
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