Fixed Deposit (FDs) are a preferred investment option in India that currently has over ₹103 trillion saved across 24.23 million deposits. FDs offer stability and guaranteed returns. However, like all investments, FDs come with both benefits and risks. Let’s explore the key pros and cons of investing in fixed deposits.
The benefits of fixed deposits
Here are some primary benefits of fixed deposits:
Assured returns
For those wondering “Is a fixed deposit safe?”, the main benefit of FDs is that they guarantee fixed returns. The interest rate is specified upfront and remains unchanged throughout the tenure, giving you certainty on returns. This makes them ideal for risk-averse investors.
Flexible tenures
Another benefit of fixed deposits is that they allow you to park your money for tenures ranging from seven days to 10 years. You can pick a suitable tenure based on your financial goals and liquidity needs. Short-term FDs of seven, 15, or 30 days help manage surplus funds for the short term. Medium-term FDs of six months to one year are good for modest returns. FDs of over one year help meet long-term goals.
Easy liquidity
While FDs have a fixed tenure, they do offer liquidity in case of emergencies. Many banks allow you to break the FD prematurely by paying a small penalty. The process is quick and online. Moreover, you can also take loans against your FDs.
Higher interest than savings accounts
Compared to savings accounts, FDs offer significantly higher interest rates ranging from 6-7% for regular customers. With a compounding effect on longer tenures, FD returns are higher.
IndusInd Bank offers attractive interest rates for your FD. Grow your savings securely with IndusInd Bank’s high-interest fixed deposits, protected by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to ₹5 lakh. Check your maturity amount using the bank’s FD rates calculator and invest today for your financial goals. The best part is that the entire process is paperless! You can book an FD with IndusInd Bank 100% digitally in just a few minutes.
The potential risks of fixed deposits
Here are some of the potential risks of fixed deposit investments:
Inflation-eroded returns
When the inflation rate is higher than the FD returns, the real rate of return is reduced. For instance, if your FD earns 7% but inflation is 10%, your real return is negative 3%. Additionally, the returns will be reduced even further after taxes. Therefore, the post-tax returns should be higher than inflation for the FD investment to be fruitful.
Interest rate risks
Interest rates keep changing based on the policies of the Reserve Bank of India (RBI) and economic conditions. If rates rise after you invest, newer FDs will earn higher interest than your deposit. Timing your FDs as per interest rate cycles and laddering your investments can help maximise returns.
When do fixed deposits make sense?
Here are some situations where parking money in FDs can be beneficial:
- Risk-averse investors looking for guaranteed returns
- Retired people looking for regular income
- As an emergency fund for contingencies
- Saving for short-term needs like education fees or down payment for a house
- Parking idle funds for short periods to earn higher interest than savings accounts
- For earning modest but stable returns for medium-term goals like car purchase
To sum up
Fixed deposits remain one of the most popular investment options in India due to the stability and guaranteed returns they offer. The key benefits include assured returns unaffected by market volatility, flexibility in choosing tenures from seven days to 10 years, easy liquidity through premature withdrawals, and interest rates higher than savings accounts.
However, FDs also come with risks like inflation eating into real returns and interest rate fluctuations impacting new investments. Timing your FDs right as per interest rate cycles and your financial needs is crucial. As part of a balanced portfolio, fixed deposits can provide stability and steady income.