Even if you don’t know about any other investment option, you’ve surely heard of Fixed Deposits (FDs). But why are they so popular? It might have something to do with the benefits of these fixed-term, fixed-interest deposits. This article will help you understand some of the main ones, but first, let’s ensure we all understand how FDs work.
What is a fixed deposit?
A fixed deposit, or FD, is one of the best investment options banks and financial institutions offer. Think of it as a savings account offering a higher interest rate. So what’s the catch? You must deposit the amount as a lump sum and lock it in for a fixed period.
The interest rate offered on FDs is higher due to the fixed tenure and the safety aspect. They are safe because they are not affected by market fluctuations.
FDs come with a range of tenures, from a few months to a few years, and the interest rate varies accordingly. Account holders can choose the interest payout frequency, which can be monthly, quarterly, or yearly. You can read more about them here.
Benefits of fixed deposits
FDs come with many benefits. Here are some of the main ones.
FDs provide surety of returns on maturity.
Fixed deposits work particularly well for the risk-averse among us, thanks to their predictable returns. The surety of returns is due to the fixed FD interest rate. This ensures that the investor knows exactly how much to expect on maturity. And it makes FDs an ideal hedge against inflation.
Besides, the returns offered are usually higher than those of savings accounts.
They help reduce portfolio risk.
As we have seen, FDs guarantee a rate of return over a fixed period. This makes fixed deposits a low-risk investment option. Furthermore, fixed deposits are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to a certain limit. This provides an extra layer of protection against loss.
These investments also help diversify a portfolio, which helps reduce overall risk.
FDs are a good option in terms of flexibility.
FDs offer flexibility in terms of investment tenure. Investors can choose to invest anywhere from a few months to several years. You can select a tenure that suits your financial goals. Besides, premature deposits are allowed, although they usually come with a penalty.
Fixed deposits are also easy to open and require minimal documentation. And it is as simple as approaching a bank or a financial institution of your choice or visiting their website.
Fixed deposits are a great way to meet short-term goals.
Because fixed deposits are a secure and reliable investment option, they help achieve your short-term financial goals. Their higher interest than savings accounts makes them useful in achieving such goals.
Additionally, you can plan better for short-term goals because FDs tell you exactly how much to expect by the term’s end.
They come with tax benefits in some cases.
Some FDs offer tax benefits under Section 80C of the Income Tax Act of 1961. So you can deduct up to Rs 1.5 lakh from your taxable income if you make an FD investment. Often, the tax-saving FDs have a five-year term, though.