What are the Pros and Cons of Investing Money in a Fixed Deposit?

Last Updated: Fri, Oct 04, 2019 13:01 hrs
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Fixed deposit (FD) is one of the most popular investment avenues that promise assured returns on investment. As compared to other investment options, the interest rates applicable on fixed deposits are reasonable too. This is why most people choose to park their hard-earned money in fixed deposits over other investment options. But before you take a plunge and make an investment in FD, we've listed some pros and cons of investing in a fixed deposit.

Fixed Deposit – The Pros

  • 1. Safe investment option: The prime benefit of investing in a fixed deposit is that it is one of the safest investment options as the return on investment in case of FDs is not based on the market fluctuations. By investing in an FD scheme, you can rest assured that your money is safe and secured.

  • 2. Assured Returns on Investment: Unlike mutual funds, stocks and debt funds, fixed deposits promise assured returns on your investment. A fixed deposit scheme offered by banks and NBFCs is certainly an advantage for those who want assured returns on their investment and also for the one who does not want to bear the loss of their money due to market fluctuations. Also, investors can compare and calculate the maturity amount before making the investment using an Fixed Deposit Calculator.

    One can calculate the maturity amount instantly by providing information like deposit amount, fixed deposit interest rate and deposit tenure. An FD calculator also helps in comparing your total earnings by calculating the maturity amount using the interest rate provided by different banks and financial institutions.

  • 3. Flexible Interest Rate Payouts: Depending on your requirements, you can choose the time periods when you want your interest rate payouts. It can be on a monthly basis, annually or at maturity, whatever suits your convenience and the bank provides you. This cash flow will act as an added income which you can either spend on something important or further invest that amount to fulfil long-term goals.

    Recently, FD interest rates were hiked by most of the banks and financial institutions. Now, any individual looking to invest in FD can earn fixed deposit interest rates up to 9%. The rate of interest offered to senior citizens is slightly higher than the interest rate offered to the general category of investors. Some Non-Banking Financial Institutions (NBFCs) like Bajaj Finserv offer 0.25% higher interest rate to a senior citizen on fixed deposit accounts. Whereas, major banks like Axis Bank provide 0.65% higher FD interest rate to senior citizens.

  • 4. Easy availability of loans and credit cards: Instead of pre-closing your FD in case of financial emergency, and later paying a hefty penalty on it, banks and NBFCs allow investors to take a loan against their Fixed Deposit accounts. FD Investors can avail a loan of up to 90% of the total FD amount. As compared to other types of loan, you get a loan against FD at low-interest rates if you keep your FD account as collateral.

Fixed Deposits - The Cons

  • 1. Lower returns on Investment: When compared to the size of return the mutual fund schemes and other investments in stocks and debt funds provide on investment, fixed deposit returns are a bit lower. But on the other hand, fixed deposit comes with higher security of funds than mutual funds and stock market as it is not based on any market fluctuations.

  • 2. Liquidity: When it comes to closing the account before the maturity period, a savings account would be a better alternative. But in case of fixed deposit account, account foreclosure or withdrawal of money from an FD before the completion of maturity date would either charge you a penalty or you will end up receiving a lower rate of investment on your deposit. For example, some banks and non-banking financial institutions would require you to stay invested for at least one year and avoid any cash withdrawal within that particular year.

  • 3. Tax Returns: Any income earned on the fixed deposit will not be exempt from tax. Instead, it would be included in your income tax slab. The interest earned from fixed deposit is eligible for 10% TDS deduction. To avail tax benefits, you can even opt for tax-saver fixed deposit schemes. You can invest up to Rs.1.5 lakh in tax saver FD and claim a deduction under Section 80C of the Income Tax Act, 1961. But, even in a tax saver FD, interest earned will be taxable. Also note that if you open an FD together with your spouse, only the first holder of the FD account can receive the tax benefits associated with the tax saving fixed deposit scheme under section 80C of the I-T Act 1961.

Conclusion

The good part about investing in a Fixed deposit account is that you can start investing in it with as low as Rs 100 (varies from one bank to another). There is no maximum limit of investing in FD. However, for deposits above Rs. 50,000, a PAN Card needs to be provided as an essential pre-requisite. Most banks offer fixed deposit accounts as a standalone product while some may ask you to link it to a savings account.

A bank fixed deposit helps people preserve funds and offer a lot of additional benefits on the fixed deposit account. Retired personnel's could make the best use of this platform. Before investing in a fixed deposit, you can check the FD Interest Rates offered by several banks in India below or calculate the maturity amount using an FD calculator instantly.

Name of the Bank

Deposit Tenure (around one year)

FD Interest Rate (Regular Individuals)*

State Bank of India

1 year to less than 2 year

6.80%

Axis Bank

1 year < 1 year 5 days

7.30%

ICICI Bank

1 year to 389 days

6.90%

HDFC Bank

1 Year

7.30%

Kotak Mahindra Bank

365 Days to 389 Days

7.30%

IndusInd Bank

1 Years to 1 Years 2 Months

8.00%

Yes Bank

12 Months 10 Days to

12 Months 20 Days

7.50%

Punjab National Bank

1 year

6.75%

Canara Bank

1 year

7.00%

Bank of Baroda

1 year

6.70%

* Interest Rates are subject to change without any prior information