A fixed deposit is a financial instrument where an investor gives a certain sum of money to a bank or a financial institution(company) and the entity pays interest for the duration of the deposit. The rate of interest paid varies depending on the amount and tenure. Investor’s, especially conservative investors, prefer to open fixed deposits as it is a safe investment option and it can be opened easily and quickly.
The reason why fixed deposits are an ideal form of investment are as follows:
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Guaranteed returns:
Unlike investment in the stock market or commodity market, fixed deposits are not a risky investment as they do not depend on fluctuating market rates. Investors can rest assured that his investments are safe and he will be getting back a guaranteed amount at the end of the tenure.
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Easily withdrawable:
The amount that is invested in fixed deposit can be withdrawn at any time for a small penalty. The investor may have a financial emergency to meet financial needs during marriage, sickness or when his business is in loss. The penalty is less than that of selling stocks or real estate as the asset cannot be sold easily because of its high value and if you are in a distressed situation, you will sell it for a much lower rate. Whereas, fixed deposits can be withdrawn at any time and all you lose is a certain interest income.
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Flexible in nature:
Fixed deposits can be taken for a tenure of 1 month or 1 year or 10 years based on your needs and for whatever amount that you can invest. Fixed deposits can be invested for a tenure of your choice. If you have planned for a big event in 5 years, then you can have a fixed deposit kept for 5 years to meet your financial requirement in 5 years. You can have various fixed deposit accounts to save for different goals.
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Encourages saving habit:
Fixed deposits require you to keep the amount for a certain period to accumulate the said interest amount. This encourages the saving habit of an individual. He will not be tempted to spend the money and find a way to manage his finances more efficiently.
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Higher rate of return:
The interest rate offered on fixed deposits are higher than that on savings account. It is also a safe form of investment where returns are guaranteed.
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Flexible interest rate pay-outs:
Interest can be paid at different intervals depending on the term you choose. Interest rates are paid at maturity, annually or monthly. Monthly and annual interest rate pay-out ensure that you have the extra income flow and can be reinvested for higher maturity benefits.
Things to consider while investing in fixed deposits:
- When you are investing in fixed deposits, it is wise for you to invest with different providers. This way you won’t have to break one entire deposit in case of emergency and provides extra security for the amount as your amount will be insured. The premature withdrawal penalty will be paid for a smaller amount while the rest of the money can keep growing.
- Fixed deposit investments can be laddered for different tenures. For instance, if you have Rs.4 lakh, split the amount in four deposits of Rs.1 lakh each for one, two, three and four years. When the one year deposit is matured, reinvest it for a different tenure depending on new interest rates. This will balance out the highs and lows in the interest over a period of time. It will also ensure liquidity as you have deposits maturing at different times.
- Make sure that you chose the right tenure as you also have to consider the lock-in period and if you are withdrawing the amount before its tenure, then the returns are lower.
- The income earned on the deposit that you have taken in the name of your spouse or your child will be clubbed with your income for tax purposes.