The benefits of investing in fixed deposits (FDs) are many. It is a risk-free investment as well as it is insured by the Reserve Bank of India for up to Rs. 5,00,000. These investments offer higher interest rates compared to savings accounts. Fixed deposit investments guard your money in times of market volatility, making them perfect for risk-averse people. Senior citizens can enjoy a higher interest rate while investing.
Fixed deposit investments also offer tax benefits. As per Section 80C of the Income Tax Act, the principal amount in a Tax Saver FD is tax-free. It is the perfect tax-saving option for salaried individuals as well as business owners. However, the FD must be held for at least five years to qualify for tax exemption. The maximum deposit limit to avail the tax exemption is Rs. 1.5 lakh.
FD investments help you achieve your short- and long-term financial goals. It is a guarantee of returns no matter how the market is doing. In the long run, this helps you to set clear financial goals. Longer tenures generally mean higher interest rates. FD investments can have tenures ranging from one week to 10 years, making them flexible for different types of financial planning. FDs can also prevent overspending as you avoid touching your money for unnecessary purchases.
A fixed deposit can be liquidated before its lock-in period ends. Therefore, an FD is accessible during financial emergencies, such as unexpected hospitalisation. There are also facilities to overdraft up to 90% of the principal amount. Moreover, the interest rates on FD investments and pay-out periods are both flexible. Interest can be paid at different intervals depending on the term you choose.
Fixed Deposit Investment Disadvantages
A risk-proof investment comes with its costs, and these include lower interest rates compared to other investments such as mutual funds. The average rate of return from mutual funds is typically over 15%. In some cases, the offered interest rate can be lower than the rate of inflation. Also, FDs have a uniform interest rate for their complete tenure, meaning gains are fixed, even if markets are performing well.
In conclusion, FDs can be a useful tool for diversifying investment portfolios, especially during market uncertainties, rising inflation, geopolitical concerns, as well as economic slowdowns. They help minimize the risk associated with market fluctuations, offering steady returns while safeguarding capital in a risk-free environment. Moreover, tax saving fixed deposit investments can help achieve short-term and long-term objectives, while also providing tax benefits. Investors should compare rates across different banks before making a decision.
