Are Fixed Deposits In Ideal Investment?

Abhilasha Sharma

Finance Manager

FD is also a term deposit. It is similar to a savings account, except that your money is locked in for a certain period, also called as term. Hence the name term deposits. However while you cannot access your money, the bank rewards you by giving you a higher interest rate than your savings account.

What are the advantages of FD?

FD has various benefits that make it an ideal investment option for those looking for capital safety.

Low risk: FD is comparatively lot safer than equities, as your deposit up to Rs. 1 lakh is insured by Deposit Insurance Credit Guarantee Corporation. So in case, if the bank fails, your money is still secured. This makes an FD an ideal investment option for senior citizens.
Regular income: Unlike dividends given by the companies, the interest earned on an FD is fixed, as the rate of interest for the particular term is constant. Even if the rates increase or decrease subsequent to your opening an FD, your rate of interest will not be affected. So you are guaranteed a regular income, making it an ideal investment option for those looking for regular income.
Availability of loan: Are you looking for a secured loan? Then you can avail of a loan by offering your FD as collateral. While your FD continues to earn interest, the rate of interest for the loan will be a few notches higher than that of the FD. Hence this type of loan works out cheaper than any other type of loan, since the bank has the assurance of claiming your deposit if you fail to repay the loan.
Saves taxes: For those looking for an efficient tax saving investment option, FD is a good option. While ELSS has the shortest lock-in period of 3 years, your capital is not secured. On the other hand, PPF offers capital security, it has a lock-in period of 15 years. The tax saving FD offers the best of both the world, as your money is locked for just 5 years while your capital is safe.

Are there any drawbacks?

While FD does have a lot of pros, it does have its share of cons. Here are some of them:

Erosion of worth of capital due to inflation: Inflation means the purchasing power of the money. When the inflation goes up, the purchasing power of money goes down. As the interest rates of the FDs are lower than rate of inflation, the purchasing power of your money deposited does go down. As a result, you end up eroding the worth of your capital.
Tax liability: Except for the tax saving FDs, the interest earned is taxed. So you end up incurring tax liability. You are particularly affected if you are a high income earner.

What should I do?

The best option for you is to invest as per your goals. If you have any short term goals i.e. goals that have to be met within 3 years, like buying a car, or going on a holiday, then FD is your best bet. On the other hand, for long term goals like retirement planning or your child’s education, go for equities.