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:
- The major advantage of investing in Fixed Deposit is its guaranteed return.
- The only reason why our parents and many in our generation also have this single concept of investment is because of its safety features.
- Also it is easy to raise a loan against your FD.
- One can borrow up to 90 per cent of the FDs amount.
- The next advantage is the flexible maturity date, it is for this feature that you can invest for a time frame that is as less as 6 months to as long as 10 years or even more.
- 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.
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.
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.