Fixed Deposits: Boon or Bane?

ArticleFixed Deposits: Boon or Bane?


Fixed Deposits: Boon or Bane?

By : Shashank Suresh

Financial knowledge is one the best skills one could learn. With the right set of skills, patience, and ability to take risks, any person can turn a small investment into a significant return. There are various ways to Invest. Fixed Deposits are one such way.

Fixed Deposits in the simplest terms mean “Depositing money for a fixed period at the start, earning interest on it, and withdrawing it at maturity period.” Fixed Deposits have been one of the most popular forms of investment and they are also considered to be a safe form of investment.

Why FDs? Not everyone likes to put their money on a high-risk investment. Many people have the goal of securing their wealth. FDs are a low-risk-low return kind of investment with the primary goal of keeping the money stable and protect it from volatility. FDs are a great way to invest for people with responsibilities, senior citizens, in a nutshell, it’s preferable for people with low-risk tolerance.

Types of FD– While the basic concept of Fixed Deposits remains the same, there are different types of FDs available in the market with each having its own set of rules and returns. Some of the types of FDs available in the market are: –

  1. Regular FD– This is the most common type of FD available in the market. It is usually available to people below the age of 60 years. The usual rate of interest offered ranges from 2.5% to 6%.
  2. Corporate FD– They are FDs catered to Corporate Firms. They usually offer a higher rate of interest and Corporate prefer putting their excess profits/capitals and gain returns on it. The usual rate of interest offered ranges from 5% to 8%.
  3. Senior Citizen FD– These are FDs for Senior citizens above the age of 60. They usually offer a higher rate of interest compared to Regular FDs to secure the wealth of senior citizens. The usual rate of interest is 0.25% to 1% higher than what is offered in Regular FDs.
  4. Tax-Saving FD– As the name suggests, these FDs exist to save taxes. Section 80 (c) of Income Tax Act, 1961 deals with various expenditures and investments that are exempted from Income Tax. It allows for a maximum deduction of up to Rs.1.5 lakh every year from an investor’s total taxable income. Section 80 (c) is applicable only for individual taxpayers and Hindu Undivided Families. Corporate bodies, partnership firms, and other businesses are not qualified to avail tax exemptions under Section 80 (c).

Drawbacks of FD– It’s often believed in the market that risk and rewards go hand-in-hand. While not everyone prefers taking a risk on their investments, people who are young and usually don’t have a lot of responsibilities FDs usually offer a very low rate of interest, and at many times, the rate of interest is lower than the inflation rate making the whole investment a loss. Further, money cannot be withdrawn from FD at will, there are penalties associated with withdrawing money prematurely. Further, once the FD has matured, there’s a high tax rate associated which makes the profits even more negligible.

FD is a good way to secure wealth but not a great way to make money. For a young person, even after diversifying their portfolio, FD should be kept minimal, if any, and their portfolio should consist more of Mutual Funds, stocks, and other markets, which might be more volatile but also give better returns over a long period.

Alternatives to FD– While we’ve gone through the advantages and disadvantages of Fixed Deposits, many people often want an alternative that is not risky yet offers better returns than FDs. There are quite a few alternatives available in the market. Some of the alternatives are: –

  1. Debt Mutual Funds– Debt mutual funds invest in comparatively secured investment options such as corporate bonds, government securities, and money market instruments. These are considered relatively safer than other mutual funds as they invest in high-rated fixed-income securities. However, these funds are sometimes vulnerable to depreciation and appreciation. But despite this, debt funds are capable of offering much higher returns than fixed deposits. They are highly liquid and can be an excellent alternative to fixed deposits.
  2. Equity Funds– These are a type of mutual funds and are great at beating inflation. It requires a portfolio manager to invest the investor’s funds for ownership of a business, which is also known as equities, like common stocks of publicly traded companies. Forming an excellent alternative to the long-term fixed deposits, they are known for returns that are predominantly higher than fixed deposits. The risk level involved with equity funds is lower when it comes to long-term investments.
  3. Corporate Fixed Deposits– The interest rates for a corporate FD are much higher than a bank FD with flexible tenure options. The downside to this form of investment is that these are not as secure as bank fixed deposits and investors should choose to invest only in well-established companies.

The best way to start investing is to research, read, and gain experience in the market. While financial planners are there to help out, it’s always important to do your due diligence. Reading up on FDs along with their potential advantages and disadvantages will help you make an informed choice while deciding where to invest next.

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