Savings is something that we are taught from a very young age and to do so we adopt several methods and measures. Some invest in mutual funds while others invest in gold or properties. There are also people who go the traditional way by saving money in different savings bank accounts. A few decades back, this method of saving money would have been enough but today, this is certainly not enough to get a comfortable life after retirement or fulfill other financial goals.
If you want to get better returns on savings, the first thing that you need to change is the way you have been saving your money. If you’re one of those people who are afraid to invest in stocks or cannot afford to invest in properties or gold, then you must consider investing in a fixed deposit.
What is a Fixed Deposit?
A fixed deposit (FD), also known as term deposit or time deposit, is one of the financial instruments offered by all banks across the nation. It is one of the safest investment options as it ensures fixed returns on the invested amount. When a person invests in a fixed deposit, his/her money gets locked for a fixed period of time and earns interest till it reaches maturity. The term or duration of a fixed deposit ranges from 7 days to 10 years. It is up to the investor whether he/she wants to invest money for a few months or a few years.
People who wish to invest money in a fixed deposit must be careful when choosing tenure for a fixed deposit. It is because the rate of interest for a fixed deposit depends on the tenure. The rate of interest also depends on the bank polices and may range from 4 percent to 9 percent. While a fixed deposit is known to have limited liquidity, that is compensated by its high rate of interest. Moreover, investing in a fixed deposit gives you a lot of benefits. Read further to learn the benefits that you may get by investing in a fixed deposit.
Benefits of a Fixed Deposit
A fixed deposit is one of the oldest forms of investment options and offers a wide array of benefits to investors. Some of those benefits are mentioned as follows:
- Returns Guaranteed
Since a fixed deposit has nothing to do with market rates, it is safe and promises guaranteed returns. The returns will only be dependent on the amount deposited, tenure of the FD and the rate of interest that is applicable as per the tenure.
- Secure Investment
A fixed deposit is known to be one of the safest investment options. Unlike other investment options such as stocks and debt funds, a fixed deposit is not dependent on the ever-changing market rates and thus involves no risk of losing money.
- Credit against FD
People who invest in fixed deposits, ideally, must not withdraw money before maturity. If they are in need of instant cash, instead of pre-closing their FD and bearing the penalty charges, they must take a loan against it. Fixed deposit investors can get a personal loan of up to 90% of the total FD amount but at a lower rate of interest.
- Tax Benefit
Yet another important benefit of investing in a fixed deposit is that it helps you in saving income tax. As per section 80 C of Income tax act, 1961, investors investing in a tax-saving FD with a lock-in period of 5 years will get a tax benefit of maximum Rs 1, 50,000.
These are some of the benefits of investing in a fixed deposit. If you’re still unconvinced, read further to learn why investing your savings in a fixed deposit is more fruitful than storing it in a savings bank account.
Why is Investing in a Fixed Deposit Better Than Keeping Money in a Savings Account?
Many people think that storing money in a savings bank account is better than investing in a fixed deposit. What they don’t realise is that storing money in their bank account is not going to help them save money for their retirement plan or to reach other financial goals. Since money stored in a bank account is readily available, it will disappear before they know it. This is why it becomes even more important to invest in a fixed deposit where you have an option to lock in your money for a specific period. The list of benefits for a fixed deposit being a better option than a savings account does not end here. Read further to learn which one is more profitable for you.
1. Interest Rates
An interest rate is one of the important factors to consider when you’re confused whether to invest in a fixed deposit or keep it as is in your savings account. If we draw comparisons between a fixed deposit and a savings account’s interest rates, then a fixed deposit is undoubtedly a smarter alternative. The interest rates offered on a savings account ranges somewhere around 3% to 8.50%. Whereas for a fixed deposit, the interest rates approximately range from 3% to 9%. However, for senior citizens, a savings account offers better interest rates. Thus, it is better to check both the rates of your bank before you choose to apply for savings accounts over a fixed deposit scheme.
2. Returns with Respect to Term
Besides considering the rate of interest, investors must also analyse from where they receive more returns in the short term. In this case, a fixed deposit scores more points as it is a better option to meet short-term financial goals. Even if you invest for a few months in a fixed deposit, you will earn more than you would from your savings accounts.
3. Benefits of Compounding
Unlike a savings account, a fixed deposit has another advantage and that is of compounding frequency. Interest on a fixed deposit is compounded on quarterly, half-yearly or an annual basis. Let’s just say that you are locking in an amount of Rs 2,000 for 10 years at 10% rate of interest, which is compounded annually. At the end of the first year, the balance rises from Rs 2000 to Rs 2,200. And next year when you earn interest on Rs 2,200, your balance rises from 2,200 to Rs 2,420, and not Rs 2,400. This is how your money grows each year. The more the frequency of compounding, the better the returns will be.
4. Tax benefit
You don’t get a tax benefit from your savings accounts. But your fixed deposit, particularly when diversified, can offer you tax benefits. As per section 80 C of Income Tax Act, 1961, investors investing in a tax-saving fixed deposit with a lock-in period of 5 years will get a tax benefit of maximum Rs 1,50,000. Therefore, if you want to save on the tax, you can invest money in FD to avail a tax deduction.
5. Loan benefit
Another prominent benefit of a fixed deposit is that it gives you better security than a savings account. If you’re in a financial emergency and need cash urgently, you can take out a loan against fixed deposit. Banks usually give a personal loan of up to 90% of the total fixed deposit amount to fixed deposit investors. Although it is at a lower rate of interest, the investors get the loan instantly if they invest in a fixed deposit. There is no such provision for a savings account.
People put their money in a bank account to earn interest. You can earn interest in both a savings account and a fixed deposit but your money grows more when locked in for a fixed tenure. While a savings account gives you no limit on the amount you deposit, no fixed tenure and better interest rates for senior citizens, a fixed deposit offers you a better rate of interest for all (except for senior citizens), compounding interest and loan and tax benefits. Therefore, if you ever have to decide between investment in a fixed deposit or keeping it in a savings account, then on the basis of the above comparisons it makes good financial sense to invest in a fixed deposit.