Fixed deposits are sound financial instruments for those who want to park their surplus money. Indians have traditionally preferred fixed deposits over other avenues such as debentures, mutual funds and shares because of the safety and stability that they offer. Like all other investments, fixed deposits too have their advantages and disadvantages. Let’s examine what these are along with the key features.

The Primary Features of a Fixed Deposit

Fixed period: A fixed deposit is a financial instrument where the money deposited by you is held by the bank for a certain fixed period of time. This is a key feature of all fixed deposits, where you are not allowed to withdraw the cash in your FD, and withdrawing it before the expiry of the maturity period will incur penalty charges or an interest rate lower than what the banks or non-banking financial companies normally offer.

One Time-deposit: The money deposited is a one-time investment and is not of a recurring type, where you have to regularly credit your account with a certain predetermined sum. Because of its one-time and fixed nature, it makes more economical sense to put a larger portion of your generally unutilized money in fixed deposits rather than keeping them idle in a bank savings accounts, where the interest rates are lowest.

Insurance/credit Rating:  Whether you open a fixed deposit in a public-sector bank or a private bank, your fixed deposit is insured by the Deposit Insurance and Credit Guarantee Corporation under which all banks in the country fall. You can safely deposit a maximum amount Rs.1 lakh in these banks. Recently, non-banking financial companies have also started offering fixed deposit at competitive interest rates. Some of the more established and trusted among them, such as Bajaj Finance, also have credit rating agencies such as CRISIL, CARE, ICRA etc., to rate their fixed deposit, so you get an idea of how safe your money is when you invest with them. Fixed Deposits offered by Bajaj Finance have been graded MAA by ICRA and FAAA/Stable Rating by CRISIL, which is high on security.

Advantages of a Fixed Deposit

Earn a higher rate of interest: By keeping a large amount of your surplus funds idle in a bank savings account, which in these days of lower interest rates are almost as good as current accounts, you are losing out. Since the interest rates are comparatively higher in fixed deposits, it makes practical sense to deposit the excess amount in fixed deposits and earn lucrative returns from them.

Streamline Your Expenditure: Having a fixed deposit forces you to streamline your expenditure. By tweaking your expenses to income ratio, you learn to avoid spending where it is not required so you can have the money when the need actually arises. This is ideal for individuals who run businesses that depend on adequate cash flows to run their day to day operations. Having a fixed deposit can serve as a lifesaver in situations where the concern happens to encounter an unexpected cash shortage. Similarly, it is great for investors of any age who want to save for personal reasons, be it a medical emergency or purchase of an asset in the future.

Liquidity and Flexibility: A fixed deposit does allow for a certain amount of flexibility. Though predominantly a fixed deposit is ‘fixed’, one can withdraw cash for unexpected and urgent needs. Of course, you may have to pay a certain penalty for withdrawing the amount prematurely, but this is certainly better than not having the money at all when you most require it.

Disadvantages of a Fixed Deposit

Inflation Must be Factored In: With the prices of essential commodities rising, the main worry is whether your fixed deposit will generate enough returns to beat the inflation rate. If the inflation rate happens to higher than the interest rate on your fixed deposit, what you are actually getting in hand could well be a negative return without you being aware of it. Therefore, it is imperative for you to get some idea of what the prevailing rate of inflation is and invest in FDs for a shorter tenor, not exceeding 5-6 years.

Lack of Diversification: By putting all your money in fixed deposits, you are actually putting all your eggs in one basket. This can prove to be counter-effective if the basket in which you have placed your assets does not yield substantial returns. Investing all your money in fixed deposits means you automatically forego the benefits of diversification where you could have invested in different asset classes such as gold and thus minimized the impact in case there is a loss. FDs should be a part of your investment portfolio along with other investment options keeping in mind your risk appetite.

Taxation Woes: Investing in fixed deposits does not offer much by way of tax relief. There is a 10% tax deduction if the interest on your fixed deposit crosses more than Rs. 10,000 in a year, which you may have to offset by making investments elsewhere.

Bajaj Finance offers high fixed deposit interest rates up to 8.10%. Not just this, you can also manage your fixed deposit entirely online. Read what other benefits are in store for Bajaj Finance customers.

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