Many people are swayed into investing in stocks, crypto, real estate, and even gold at the start of their careers. But your investment journey can commence with something as simple as fixed deposits. Here’s explaining why this may be a good investment option for you.
Why should you invest in fixed deposits?
Fixed deposits are a low-risk investment option. They come with guaranteed returns, flexible tenure options, and easy management. Anyone who wants decent returns without taking on a high level of risk may thus find this useful.
Some reasons why you should consider investing in fixed deposits are:
- Guaranteed returns: Fixed deposits offer a guaranteed return on your investment, so you know exactly how much you will earn at the end of the day. The interest rate is fixed for the entire tenure of the deposit. That means no need to worry about fluctuations in the market affecting your returns.
- Low risk: Fixed deposits are considered a low-risk investment option as market volatility or fluctuations in interest rates don’t affect them. Additionally, most fixed deposits of up to ₹5 lakh are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
- Flexible tenure options: Fixed deposits come with flexible tenure options that allow you to choose the duration of your investment. You can choose a tenure that ranges from a few months to several years.
- Easy to manage: Fixed deposits are easy to manage and do not require any active monitoring or management. Once you have invested your money, you can relax, knowing your investment is safe and secure.
- Additional benefits: Some fixed deposits include loan facilities, premature withdrawal options, and higher interest rates for senior citizens.
Additionally, considering the following factors will also help.
Banks deduct Tax Deducted at Source (TDS) on interest earned on fixed deposits. As per the current regulations, TDS applies to FD interest income exceeding ₹40,000 in a financial year. The TDS rate is 10% if you provide the PAN number and 20% if not. However, senior citizens can submit Form 15H to the bank to avoid some of these deductions.
Banks offer a renewal facility for fixed deposits. In this facility, the principal amount and the interest earned can be reinvested in another fixed deposit upon maturity. This helps keep your money invested longer without the hassle of manual reinvesting.
Flexibility in terms of tenure
Banks offer flexible tenure options for fixed deposits. One can choose anything from as little as seven days to as long as ten years. You can choose a tenure based on your investment horizon and financial goals.
Banks also offer a sweep-out facility where the fixed deposit can be linked to a savings or current account. In case of insufficient balance in the linked account, the requisite amount is automatically swept out from the FD. This facility lets you earn higher interest rates on your fixed deposit while ensuring easy access to your funds.
Banks also offer a loan facility against the fixed deposit. You can use your FD as collateral and get up to 90% of the deposit amount in loan form. The interest on loans is usually 1–2% higher than on fixed deposits. This facility gives you instant access to funds without breaking the fixed deposit and losing the interest earned.
Things to keep in mind before investing in fixed deposit
Before investing in a fixed deposit, it is important to consider the interest rate, tenure, returns and inflation, loan against fixed deposits, and tax deduction benefits. Before deciding, you should also evaluate your financial goals, liquidity requirements, and risk appetite. Compare the offerings of various banks and financial institutions as well.
The interest rate on a fixed deposit is important to consider before investing. It is good to compare the interest rates of various banks and institutions before deciding. Higher interest rates offer higher returns.
The tenure of the fixed deposit is another important factor to consider. Longer tenures usually offer higher interest rates, but you should also consider your financial goals and liquidity requirements. If you need funds in the near future, you may want to opt for a shorter tenure.
Returns and inflation
Inflation reduces the purchasing power of your returns over time. So it is important to factor in the inflation rate. Choose a fixed deposit that offers returns over the inflation rate.
Loan against fixed deposits
Many banks and financial institutions offer loans against fixed deposits. While this facility provides easy access to funds, you should also consider the interest on the loan and whether it is worth breaking the fixed deposit and losing the interest earned.
Tax deduction benefits
Fixed deposits offer tax deduction benefits under Section 80C of the Income Tax Act, 1961. The maximum deduction allowed is up to ₹1.5 lakh per financial year. However, you should also consider the TDS limit and the tax liability on the interest earned.
Fixed deposits are considered to be one of the safest investment options available. They offer a fixed interest rate, and the principal amount is guaranteed.
However, there are still some risks associated with fixed deposits, including inflation risk, interest rate risk (when the bank reduces them), Credit risk (when a bank or a financial institution defaults), and even liquidity risk (the inability to break a fixed deposit). Considering these risks and evaluating your financial goals and risk appetite is important before investing in fixed deposits.
1. I am a housewife. Can I start a fixed deposit, and is it a good investment option?
A housewife can start a fixed deposit with any bank or financial institution. You would be surprised to find the many women-centric schemes that offer higher interest rates. You should also know that fixed deposits are a safe investment option and provide a steady source of income.
2. What are the best banks to invest in a fixed deposit?
Several banks in India offer attractive interest rates on fixed deposits. Some popular ones include SBI, HDFC Bank, ICICI Bank, Axis Bank, and Kotak Mahindra Bank. However, the best bank for your fixed deposits depends on your financial goals and needs.
3. What is the best interest rate offered on fixed deposits?
The best interest rate on fixed deposits varies across banks and financial institutions. Some banks offer interest rates of up to 7% for fixed deposits with a tenure of 5+ years. However, the interest rate also depends on factors such as the tenure of the deposit and the amount invested.
4. Why do banks have different interest rates for fixed deposits for senior citizens and women?
Banks offer different interest rates for fixed deposits for senior citizens and women to encourage them to save more. Senior citizens are typically offered higher interest rates as they are considered low-risk. On the other hand, banks offer preferential rates to women. Read this to learn more about senior citizen FD rates.