Should FDs be in your investment portfolio?
In a world of seemingly endless investment products, we explore the importance of including Fixed Deposits in your portfolio.
As most seasoned investors will tell you, when it comes to investing, diversification is essential. Both in terms of spreading your risk as well as earning a healthy return, it is advisable to spread your bets keeping in mind your particular financial goals.
The most commonly discussed investment options include Fixed Deposits , equity and debt, each of which are different in terms of risk and return. It is advisable to spread investments across all these asset groups in differing proportions, with asset classes such as equity being associated with the potential for higher returns due to higher risk and FDs being considered a far safer, more secure option to earn stable returns.
Aside from your personal risk appetite, your spread and allotment of investments across these asset classes such may well be influenced by market conditions. During times of economic uncertainty (such as during major elections), people tend to gravitate more towards fixed deposits. Similarly, during a booming economy people are more ready to take risks and therefore may favor equity investments.
Aside from this, there is a range of factors that impact how appealing a Fixed Deposit account may be the right investment for you. These could include:
- Risk appetite: FDs are seen as far safer investment option than equities and therefore would be ideal for the risk-averse investor looking to earn a fixed return and make the most out of their idle funds.
- Safe and secure Beyond the safety of lower risk, Fixed Deposit accounts in banks are also insured by the Deposit Insurance Credit Guarantee Corporation. So if a given financial institution fails, your money is still secure.
- Regular incomeUnlike unstable and uncertain dividends issued by companies, FD interest is fixed. This allows for easier financial planning as, even if the rates increase or decrease after opening your Fixed Deposit account, your rate of interest will not be affected.
- Easier access to borrowingYou can offer your FD as collateral when applying for a loan which is particularly helpful for those who may not have other assets to offer as collateral when applying for a loan. While your FD continues to earn interest, the rate of interest for the loan will be a slightly higher than that of the FD. This type of loan therefore, works out cheaper than any other type of loan, since the bank has the comfort of knowing it can claim your deposit if you fail to repay the borrowed amount.
FDs also have their drawbacks. These include:
- Keeping up with inflation: Investing in FD only makes financial sense if the rates offered are above that of inflation so the real value of your money doesn’t erode.
- Tax liability: Interest earned on an FD is taxable, which can be intimidating for investors, particularly those in a higher tax bracket.
In the end, the best option for you is to go for investments that best suit your personal goals. Having said that, having some funds parked in Fixed Deposits is always advisable as many companies such as Bajaj Finance offer attractive rates of return.