Any investment portfolio should have the right mix of safe, moderate and risky investments. Commodities and stocks are moderate and high risk investments, while government bonds, fixed deposits are safe investments. One of the easier ways to make your money work for you is investing in an FD.
Fixed deposit means that the amount is deposited for a fixed time and is repayable to the investor only after a specific period is over. This does not imply that the investor loses rights over the money for the tenure decided. Investors can withdraw the amount in case of an emergency. He, however, would lose a portion of the interest payable and would have to pay a penalty as well. Some financial institutions have introduced variable interest FDs, where rate of return will vary according to the prevalent market rates. If market interest rates increase, FD rates will increase and vice versa.
Assured rates of return
Mutual funds and other stock market instruments may become vulnerable to market fluctuations beyond one’s control. The rate of returns is not fixed, as performance depends on market factors. However, depositing your money in a fixed account guarantees a fixed amount at the end of the tenure. FDs are not subjected to risky factors and are thus a safe investment.
Investors can avail loans on FDs
Investors can avail loan facilities on the amount deposited in FDs. The rate of interest on the loan is usually 1-2% higher than the rate offered on the FD.
Fixed Deposits saves tax
There is a special type of FD, known as Tax Saver FD, which allows tax deduction under section 80C of the Indian Income Tax Act, 1961. Investors can claim a maximum of Rs. 1,50,000 by investing in such accounts. Normally, tax saver FDs are offered for a lock-in period of five years. Premature withdrawal is not allowed on these accounts. Hence, one receives assured returns, apart from saving tax.
Encourages savings
Investing in an FD encourages saving habits as it holds money for a fixed duration of time without making any withdrawals. Investors who withdraw the amount or break the FD before the tenure expires, suffer loss in interest or penalty.
Amount can easily be withdrawn
FDs are liquid, hence investors can withdraw the amount if an emergency should arise. Though premature withdrawal may result in some loss of interest and payment of penalty, it is better than selling stock. Selling stock or real estate may have a distressed value rather than true or appreciated value.
Fixed deposits are flexible
Unlike real estate, which requires heavy investments for a long period of time, FD terms are very flexible in nature. One can invest in a FD with maturity ranging from 1 month to a year to 10 years.
Regular income
In India, most FDs are compounded quarterly. Individuals who wish to receive income on a regular basis can opt for such this type of investment. However, they carry reinvestment risk- the risk of not getting the same interest rate after maturity. Many banks are lowering their fixed deposit rates. Hence, locking in now for a long term is an advisable option.
Do your research well before making an investment in a FD. Look for banks offering good rates of interest. Do not invest in banks which do not have a long history. If you wish to make a premature withdrawal, consult your advisor whether taking an overdraft will be beneficial. Last but not the least, remember that FDs are a safer investment option as they have negligible risks. Invest in them before your bank offers a lower fixed deposit interest rate than the one prevailing today.
Know more about fixed deposits at Mahindra Finance.
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