What Are The Pros & Cons Of Investing In Fixed Deposit?

Investing your hard-earned money is in the right avenue is essential. It can help you take a few thousand and watch them grow into lakhs in a matter of a couple of years. Not only that, protecting your corpus such that it does not decline or deplete while you make such investments is equally important. Fixed deposit or as popularly referred to as FD’s are one such area of investment where you can ensure the safety of your corpus and also enjoy the growth prospects securely.

Fixed deposit not only help you kickstart your investment portfolio but also are easy to understand, unlike other investments. A fixed deposit holds your corpus for a fixed duration of time as specified by the instrument an accrue interest on them till its maturity. The earnings in forms of FD interest rates are higher than simply holding your money in a savings bank account.

Apart from that, there is extremely low volatility involved, attracting risk-averse senior citizens and first-time investors. Let us have a look at the advantages of investing in fixed deposit-

Flexibility of Tenures

When we compare the investment avenues for risk-averse investors, the top 2 choices are PPF and FD’s. Unlike PPF, you do not need to have it locked in for a definitive duration, but instead, you can choose your tenure of investment depending on your financial goals. The minimum duration can be as low as seven days to a maximum period of ten years.

Loan Against Fixed Deposit

Emergencies call for emergency actions like diluting your investments to fund those emergencies. Fixed deposit can help you obtain loans against the security of such investments. Premature closure of your fixed deposit is not required to support your financial needs. One can secure loans up to 90% against the amount of fixed deposit, although this varies across different financial institutions.

Risk-Averse Investment Avenue

Investments in stocks, mutual funds, or other debt funds have high volatility, unlike fixed deposit. Moreover, one can ensure they receive a guaranteed sum on maturity makes it a more reliable investment avenue for a risk-averse investor.

Tax Saving Alternative

There are fixed deposit that have a tax saving option. One can claim investments in such fixed deposit as a deduction under section 80C of the Income Tax Act, 1961. A word of caution, there is a lock-in of 5 years from the date of investment under such tax saver fixed deposit.

While the above maybe some of the notable advantages of fixed deposits, there are few areas of concern which you should keep in mind. They are as follows-

Taxable Income

The interest earned on your FD investments is categorized as taxable income. Also, if the interest so earned is above Rs 40,000 (previously Rs 10,000), the tax shall be deducted at source by the financial institution at the rate of 10%. Consequently, if a senior citizen earns the same income, there are TDS implications above Rs 50,000. You can invest in tax saver FD to increase your tax benefits.

Lower Returns

Although fixed deposit investment offers guaranteed returns, they are comparatively lower than other market-related investments.

Liquidity

It is another area of concern where if one needs funds and they liquidate their investment, they may incur a penalty charge. Not only that, but there are instances where one receives lower FD interest rates when they break their FD investment.

Looking at the above, we can conclude that the pros of investing in fixed deposit outweigh the cons. Thus it is one of the better alternatives that one can buy with a safety net of guaranteed returns. Moreover, there is very less volatility associated with the returns. Be wise and make the best choice to stay invested using a fixed deposit.

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