The pros and cons of investing in fixed deposit
Investors are constantly seeking ways to boost their returns. While investing in stocks and mutual funds might provide higher returns, they come with risks too. This is why investors opt for other options, such as fixed deposits.
Fixed deposits have always been the preferred option for retirement or future investments of our previous generations. And even today, people frequently start with bank fixed deposits (FDs) when starting an investment journey.
So, if you are planning to consider FD for your next investment, you should know the pros and cons.
In this article, we will take a closer look at the pros and cons of investing in fixed deposits so that you can make an informed decision.
What are the pros of investing in fixed deposits?
There are many pros to investing in fixed deposits; a few of them are:
1. Guaranteed Returns
Fixed deposits are a significant investment to lock in your returns and earn guaranteed interest. This is because when you invest in a fixed deposit, the interest rate is pre-decided, and it does not change with market fluctuations. Moreover, the longer the deposit period, the higher the interest rates.
It is essential to note that there is no limit on how much you can invest in a fixed deposit.
Moreover, you can use the fixed deposit interest calculator to know the amount you will receive at maturity and the total interest earned.
The risk of losing money on a fixed deposit is negligible compared to other investment options like stocks or mutual funds.
The sum invested in fixed deposits is unaffected by changes in the market. It provides a guaranteed return, thus making it suitable for investors with a low-risk tolerance level.
3. Tenor Flexibility
Depending on your investment needs and goals, you can choose from various tenors for your fixed deposits, ranging from 7 days to more than ten years. This flexibility makes it easier to manage your investments over time by spreading them out over extended periods.
4. Good for Diversification
Fixed deposits work well as a tool for diversification because they offer stable returns that do not fluctuate with the stock market or other related factors. You can also use this strategy to build a more extensive portfolio without worrying about losing money. It can also provide periodic stable returns to meet your needs.
5. Loan against FD
When an emergency arises and you need urgent cash, you can opt for a loan against FD. Nearly all banks provide the option of taking a loan against an FD. The loan amount is determined by the FD’s deposit value and term. To learn more about the restrictions on using this facility, speak with your bank. Such loans may have exorbitant interest rates.
Suppose a bank (excluding NBFCs) has been placed under a moratorium due to an unusual shutdown of the business. In that case, the investor may receive up to 5 lakh in insurance within 90 days, per new guidelines by DICGC Act.
What are the cons of investing in fixed deposits?
Though there are many pros to investing in a fixed deposit, there are a few disadvantages too.
1. Less liquidity
A fixed deposit is an instrument that offers some financial security but does not provide the kind of liquidity that a bank account offers. A bank will charge you a penalty fee if you want to cash out your fixed deposits before maturity.
2. Not inflation-beating returns
For the duration of the deposit, interest rates on fixed-rate deposits are fixed. They lack dynamic characteristics.
Thus, fixed deposits do not offer inflation-beating returns like other investment instruments such as equity or mutual funds.
So if you invest in such an instrument, you may lose money after a few years because of increased costs due to inflation.
3. No tax benefits
An FD does not qualify for a tax deduction. Earned interest income is a component of the person’s taxable income.
Investment decisions can often seem overwhelming with numerous instruments available. FDs remain viable for investors looking for long-term returns without worrying about market volatility.
However, investors must consider a few things before investing in an FD. For instance, the FD scheme allows investors to lock their funds under fixed interest rates when opening an account. This requires a person’s tolerance level and patience for the selected tenure. Also, you must choose a reputable lender to secure your investment and get the most out of your deposit.
RBL Bank Ltd. is one of the finest and most reputable fixed deposit lenders, offering an interest of 6.65% on your fixed deposits. It also has a fd calculator to know the amount you will receive at maturity and the total interest earned.
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