Top 9 Benefits of Fixed Deposits | Investing in FDs

When it comes to investment, a typical investor is inclined to include a “safe” investment with guaranteed returns, in their portfolio. Public Provident Fund (PPF), Employees’ Provident Fund (EPF), Recurring Deposits (RD), and Fixed Deposit (FD) are some of the preferred forms of safe and risk-free investment options available to all of us.

These are also known as savings instruments, as the primary objective here is to save money for the future. Of all the options mentioned earlier, fixed deposit is one of India’s most trusted money-saving and investment tools. In fact, in FY2020, Indians had deposited over Rs 46 trillion as individual assets in FDs across banks.

A fixed deposit has been the traditional form of money-saving and investment option for us, and more so for our elder generations. In this article, we aim to help you understand the top benefits of fixed deposit and why it is a popular tool for saving money. So, let’s dive right in.

What is a Fixed Deposit?

In India, banks, post office and non-banking financial companies (NBFC) offer fixed deposits as an investment instrument to customers. As the name suggests, you deposit a certain amount for a “fixed” time frame and earn fixed interest. Banks, as well as different financial institutions, provide a competitive rate of interest on these deposits. The tenure of these deposits generally ranges from as little as 7 days to even a decade. 

Over the years, FDs have evolved into a flexible and highly versatile financial product providing a diverse set of benefits to investors.

Types of Fixed Deposits

Before understanding the benefits of fixed deposits, let us first get a quick overview of the different types available in the market:

• Standard Deposit: A standard term FD is one where you deposit an amount with a bank or other financial institution for a certain period of time and at a set interest rate. The investment tenure can range from a week to ten years. Typically, the rate of interest depends on the duration of the deposit.
• Tax-Saver FDs: Certain fixed deposits are eligible for tax rebates under the Income Tax (IT) Act, 1961. A tax-saving FD, having a maturity period of five years, allows you to claim for a tax-exemption of up to Rs.1,50,000 per year under section 80C.
• Fixed Deposit for Senior Citizens: Banks and NBFCs offer a particular type of fixed deposit for people above 60 years of age. The interest rates for such FDs are typically 0.25%-0.50% higher than the regular FDs. Moreover, such investments offer an additional tax benefit on the interest. There is no TDS deducted, if the interest earned on the fixed deposit is less than Rs 50,000. 
• Corporate Fixed Deposit: A few companies or corporates can also provide fixed deposits. The interest rate is generally more than the one offered by a bank or NBFC. However, it comes with a greater risk. Such FDs do not have the Deposit Insurance and Credit Guarantee Corporation (DIGC) insurance coverage. Hence, if the company winds up, there’s a good chance that you may not get your money back.
• Flexi FD: These FDs are linked to your savings account and have an auto sweep-in feature. Basically, you can instruct the bank to debit any amount beyond a certain balance from your savings account and convert it into a FD. On the other hand, if the account balance drops below that set amount, the bank can liquidate some portion of the FD and level up your account balance.
• FDs for Non-Resident Indians: Non-resident Indians (NRIs) can also open a fixed deposit in any nationalised bank through their non-resident ordinary (NRO) or non-resident external (NRE) accounts. One of the most significant advantages of NRE FD is that the principal amount and interest earned are tax-free. However, an NRO FD is taxed at 30% annually.

After understanding the different types of fixed deposits, let us now look at the benefits of fixed deposits.

Benefits of Fixed Deposit Account

• Assured Rate of Return: Unlike market-linked investment options such as stocks or equity mutual funds, FDs offer fixed returns throughout the tenure. These assured returns are a major reason why people prefer to park their funds in a fixed deposit account. As the probability of loss is almost nil, your principal amount remains safe and untouched. Further, the rate of return is also typically higher than your regular savings account.
• Insurance Backed Savings: One of the other FD advantages is that it comes with insurance coverage. The DIGC, a subsidiary of the Reserve Bank of India (RBI), offers protection up to Rs 5,00,000 on bank fixed deposits. That adds a layer of safety to your capital in case the bank defaults.
• Tenure Flexibility: A key benefit of fixed deposit is that it offers flexible tenures wherein you can choose how long you want to keep your capital with the bank. However, each bank or NBFC has their respective minimum tenure. Still, they also offer a range of horizons to choose from. Additionally, certain FDs come with the option of auto-renewal.
• Ease of Liquidity: One of the major advantages of fixed deposit accounts is their high liquidity. You have the option to redeem your fixed deposit before it matures. However, you will lose out interest in the remaining period and some banks charge a penalty for early withdrawal. Nonetheless, fixed deposits offer excellent liquidity when you require urgent cash.
• Low Risk: Another benefit of a fixed deposit is that it comes with almost no risk. Most market-linked securities are volatile and influenced by ongoing economic conditions. Such is not the case with fixed deposits. You can rest easy knowing that your capital in an FD is safe, and the interest earned is independent of market conditions.
• Easy Reinvestment: One of the key features of a fixed deposit account is that when your FD matures, you can choose to extend the tenure and direct the bank to reinvest the amount for a new term.
• Magic of Compounding: If you choose to reinvest your matured FD, you also enjoy the power of compounding. That means you will earn interest on the new amount, which consists of your original principal and accrued interest over the previous tenure.
• Tax Benefit: As we have discussed above, certain fixed deposits offer tax rebates. Under the Income Tax Act, 1961, you can claim deductions up to Rs 1,50,000 against your fixed deposit. However, you cannot withdraw funds invested in a tax-saver FD during the five-year lock-in period.
• Loan Against Fixed Deposit: Another vital FD benefit is that you can avail of a loan against the investment. You can present the FD as collateral and get a loan at a lower interest rate.

Also Read: Experience financial growth with unmatched Bajaj Finance FD Rates

How do FDs Work?

When you invest in a fixed deposit, you are basically lending money to a bank or NBFC for a certain period, called the deposit tenure. Now, the bank may lend this same money to other borrowers and charge them an interest. A specific portion of this earned interest will be given to you.

Generally, banks allow you to invest flexibly with tenures ranging from a week to ten years. Your interest income will depend on the investment tenure, with short period FDs offering lower interest. Usually, you are not allowed to withdraw money before the tenure ends. However, some banks may allow such premature withdrawals by charging a penalty. Once the FD matures, the bank credits the principal amount and the accrued interest back to your account.

Role of FDs in Your Portfolio

Giving Balance to Your Portfolio:

Fixed deposits are a risk-free investment tool. Hence, they offer a great balance to your portfolio against other investments such as stocks or mutual funds.

Good for Short-term Objectives:

Another value addition fixed deposits offer is achieving your financial objectives. You can choose to invest in fixed deposits for objectives wherein you cannot afford to lose out on your principal amount. The amount remains safe, and you earn additional interest, making it an ideal scenario.

Who Should Invest in Fixed Deposit?

As a risk-free investment option, a fixed deposit is ideal for risk-averse investors as well as people with high-risk appetite. For the former, it is an excellent tool to grow their money over five to ten years. While for people who invest actively in market-linked instruments, FDs will provide diversification to their portfolio. Moreover, if your income falls in the tax-bracket, you can consider investing in tax-saving Fixed Deposits.

With the different types of FDs available in the market, you can choose the one that best suits your needs and use it to build your wealth over a period or save up to purchase an asset. FDs can serve both your short-term and long-term financial objectives.

In the End

Various money-making options are available in the market, ranging from stocks and mutual funds to bonds. A fixed deposit can be the ideal investment tool if you are a novice in the domain, looking to save money and grow it over time. The different types of FDs can serve a variety of your needs and hence must be chosen wisely before investing.

FAQs