Fixed Deposit Beginner

Fixed deposits vs. savings accounts

Fixed deposits and savings accounts are two popular investment options in India. While banks offer both options, they differ in many ways. They come with different interest rates, liquidity, and minimum deposit requirements, so you must take all that on board if you wish to compare them. Not to worry, though, because this article will help give your analysis a jumpstart.

Introduction

Simply put, savings accounts are the way to go if you have long-term commitment issues. Otherwise, fixed deposits may be the way to go. But that’s a simplification. The choice between a fixed deposit and a savings account ultimately depends on the individual’s financial goals and needs.

What are fixed deposits?

An FD is a financial instrument that banks and other financial institutions offer. It is a popular option because it provides fixed returns for a fixed period. When you open an FD account, you thus lock in your money for a period ranging from a few months to several years.

The interest rate does not change with market fluctuations. That makes them low-risk. Besides, the government insures FDs up to a certain amount.

In case you’re wondering how FDs work, well, it depends. Depends on the type. And there are two types—cumulative FDs and non-cumulative FDs. In cumulative FDs, the interest and principal amount is paid out at the end of the term. In non-cumulative FDs, the interest is paid out at regular intervals—on a monthly, quarterly, or annual basis.

A penalty applies when there is an early withdrawal. However, some banks offer premature withdrawals with a reduced interest rate. Read more about these accounts here.

What are savings accounts?

A savings account is the most common bank account type. With this type of account, transactions are much easier. They only require the maintenance of a minimum balance to earn interest, and withdrawals are free to a significant extent. This financial product is typically used to hold money for more immediate expenses.

Banks, credit unions, and other financial institutions offer savings accounts. Some savings accounts offer higher interest rates than others, depending on the institution and the current market conditions.

The Federal Deposit Insurance Corporation (FDIC) usually insures the money in savings accounts. That means it protects investors up to a certain amount in case of bank failure. However, it’s important to note that the interest earned on a savings account is taxable.

Other benefits of savings accounts are online access, ATM cards, and automatic transfers. However, savings accounts sometimes restrict the number of free withdrawals per month.

A savings account can be a valuable tool in managing your finances. By choosing the right one, you can earn interest on your money while maintaining liquidity.

The difference between fixed deposits and savings accounts

Fixed deposits and savings accounts are popular financial instruments. They both help store and grow one’s money. However, there are some key differences.

A savings account, for one, is a basic account that allows you to easily transact money. These accounts have the highest flexibility. They allow account holders to deposit and withdraw money at any time. Besides, a penalty usually applies to the premature withdrawal of FDs.

Savings accounts usually offer a lower interest rate than FDs. But the money is easily accessible. So it makes sense to use it for regular transactions like paying bills, buying groceries, etc.

On the other hand, a fixed deposit lets you invest a lump sum of money for a fixed period. In exchange, you get higher interest than with savings. The period, on the other hand, usually ranges from a few months to several years. FDs must incur a penalty if you withdraw before maturity.

FDs are a good option for those who want to save for a specific long-term goal, like buying a house or car. They also work well for those who want higher interest than savings account holders. However, a savings account is the better option.

Which is better—fixed deposits or savings accounts?

One can save money in several ways. Savings accounts and fixed deposits are two of the option available. Both have their advantages and disadvantages. So, in conclusion, choosing between a fixed deposit and a savings account largely depends on individual financial goals and priorities. You may benefit from factoring in the following details, though.

Savings accounts are more flexible regarding access to funds. You can deposit and withdraw funds as often as you, please.

Besides, savings deposits work best for those who want to save money for short-term goals, emergencies, or everyday expenses.

On the other hand, because FDs offer a higher interest rate than savings accounts, they may be more suitable for long-term goal planning. That means FDs may be better if thinking about buying a house or planning retirement.

FDs also offer a guaranteed return on investment, making them a relatively safe option.

Conclusion

A savings account offers easy accessibility and liquidity. So they are ideal for short-term savings or emergency funds. On the other hand, fixed deposits offer higher interest rates and guaranteed returns over a fixed period. That makes them a more viable option for long-term savings.

When deciding, it’s crucial to look into factors such as the number of funds available, the investment horizon, and the investor’s risk tolerance. Additionally, also compare the interest rates and associated fees of different banks.

FAQs

What are the disadvantages of fixed deposit?

Fixed deposits have lower returns, fixed interest rates, a lock-in period, and face tax implications. Premature closure incurs penalties, and returns may not counter inflation risks.

Is fixed deposit the same as savings?

Fixed deposits have fixed interest rates and lock-in periods, providing higher returns, while savings accounts offer flexibility with variable interest rates but lower returns.

Is it good to save money in fixed deposit?

Yes, saving money in a fixed deposit is good for low-risk investors seeking guaranteed returns with fixed interest rates, fixed tenures, and flexible interest rate payout options.

Which is better savings account or time deposit?

It depends on your financial goals. A savings account offers liquidity, while a time deposit provides higher interest but ties up funds for a fixed period.

Disclaimer: Fixed deposit products are generally considered safe investments as they are not subject to market fluctuations. However, investors are advised to exercise caution while investing in FDs. Risks include the financial position and solvency of the issuing company/entity during the tenure of the deposit. The facts mentioned in this article are for informational purposes only and should not be considered investment/financial advice from CoinSwitch.

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