Wondering whether to invest that bonus in a short-term or a long-term fixed deposit? Well, this article has got you covered on what to choose when it comes to a fixed deposit, how to choose one, features, benefits, and everything you need to know to make a wise investment choice. Let’s dig in.
Short-term or long-term fixed deposit: Which one should you choose?
Before identifying a short-term or a long-term deposit, it is important to understand these schemes. A fixed deposit is a type of savings account offered by banks and financial institutions that allows customers to deposit a certain amount of money for a fixed period of time. Deposits with tenures of days, weeks, and months are short-term deposits, while the ones with more than a year’s tenure are long-term deposits.
The interest rate offered on any fixed deposit is typically higher than that of regular savings accounts, while the deposit amount and interest rate remain fixed during the term. At the end of the fixed term, the customer can withdraw the principal amount and the accumulated interest, or they can choose to renew the deposit for another term.
Short-term fixed deposits are a low-risk investment option, providing a guaranteed return on investment while protecting the principal amount. They are ideal for those with surplus funds that they do not need to use immediately and want to earn a higher interest rate than a regular savings account.
To sum up, short-term and long-term deposits differ in terms of the tenure of deposits and the interest rates offered. Short-term deposits typically have a maturity period of up to one year, while long-term deposits usually have a maturity period of more than one year.
Features of short-term fixed deposit
Overall, a short-term fixed deposit can be a good investment option for those who want to earn a higher return on their funds while keeping their investment horizon relatively short. The features of short tenure, the option to renew, higher returns, and minimum amount make it a convenient and flexible investment option for many investors.
Short tenure
A short-term fixed deposit typically has a tenure of less than a year, often ranging from 1 month to 12 months. This makes it a convenient investment option for those who want to avoid committing their funds for a longer period of time.
Option to renew
Many banks and financial institutions offer the option to renew a short-term fixed deposit upon maturity. This means that the investor can choose to reinvest their funds for another short period, typically at the prevailing interest rate. This allows the investor to continue earning interest on their investment without having to go through the process of opening a new fixed deposit account.
Higher returns
Short-term fixed deposits often offer higher interest rates than savings accounts, making them an attractive investment option for those looking to earn a higher return on their funds. However, the interest rates offered by fixed deposits may vary depending on the prevailing market conditions and the tenure of the investment.
Minimum amount
You can start a short-term fixed deposit with as little as ₹1,000. The amount may vary depending on the institution and the tenure of the investment. Investing in a short-term fixed deposit with a minimum amount can be a good option for those with a small amount of money to invest but still want to earn a higher return than a savings account.
Features of long-term fixed deposit
A long-term fixed deposit can be a good investment option for those who want to earn a higher interest rate while investing their funds for longer. A tax deduction, flexible tenure and renewal, and interest rate make it an attractive investment option for many investors looking for a low-risk investment option with stable returns.
Tax deduction
Long-term fixed deposits are eligible for tax deduction under Section 80C of the Income Tax Act up to a maximum limit of Rs. 1.5 lakh per financial year. This makes long-term fixed deposits a popular investment option for those looking to save on their taxes while earning a higher interest rate than a savings account.
Flexible tenure and renewal
Long-term fixed deposits typically have a tenure of 5 years or more, making them a good investment option for those looking to invest their funds for a longer period of time. Many banks and financial institutions offer the option to renew a long-term fixed deposit upon maturity, allowing the investor to continue earning interest on their investment. Additionally, some institutions provide the opportunity to withdraw the investment before maturity, although this may come with a penalty or lower interest rate.
Rate of interest
Long-term fixed deposits often offer higher interest rates than short-term fixed deposits or savings accounts. The interest rates offered by long-term fixed deposits may vary depending on the prevailing market conditions and the tenure of the investment.
Major differences between long-term & short-term fixed deposits
Short-term and long-term deposits differ on various counts. The one striking difference is the interest rate. The interest rate offered on short-term deposits is generally lower than on long-term deposits. Long-term deposits typically offer higher interest rates to compensate for the increased risk of locking up funds for a longer period.
Tenure
The tenure in short-term fixed deposits is in days or up to six months. Long-term fixed deposits can start from 6 months to several years.
Returns
Long-term deposits offer higher interest rates and, therefore, better returns. But such deposits carry a higher risk due to the long tenure that the funds are locked up and the possibility of changes in interest rates or market conditions.
Premature withdrawal options
Another key difference between short-term and long-term deposits is their liquidity. Short-term deposits can be withdrawn or renewed quickly without penalty, while long-term deposits may incur penalties or fees for early withdrawal.
Safety
Generally, short-term fixed deposits are more secure since the shorter time means lesser risk. But long-term fixed deposits institutionalized by banks can be safe, and a secure investment option as the financial institution backs them. Most banks and financial institutions also offer insurance on the deposited amount, making it a low-risk investment option.
Conclusion
Ultimately, the choice between short-term and long-term deposits depends on the individual’s financial goals, risk tolerance, and liquidity needs. Short-term deposits are generally better for those who need quick access to their funds or want to invest for a shorter period. However, long-term deposits may be more suitable for those willing to lock up their funds for an extended period in exchange for higher interest rates.
FAQs
Which is better short term FD or long-term FD?
The choice between short-term and long-term FDs depends on your financial goals. Short-term FDs offer liquidity, while long-term FDs provide higher interest rates and steady returns. Consider your needs for the best option.
Is short term FD good?
Short-term FDs offer liquidity and flexibility but may have lower interest rates. They suit those needing quick access to funds. Assess your financial goals for the right choice.
Which FD is best for long-term?
The best FD for long-term depends on your goals. Consider banks or financial institutions offering competitive interest rates, safety, and lock-in periods aligning with your financial plan.
Which type of FD is best?
The best FD type depends on your financial goals. Choose between fixed, recurring, or tax-saving FDs based on factors like tenure, interest rates, and liquidity needs. Consult a financial expert for personalized advice.
Is short-term better than long-term fixed deposit investments?
Ideally, it depends on the financial institution that offers the short-term or long-term plan. The success of an investment also depends on your financial goals.
