Why Should You Have Fixed Deposits as One of The Investment Options?
When it is time to audit our savings and restructure our investments by looking into our finances, we often think of ways to diversify the risk of our investment portfolio. Understanding which investment options suit your needs is perhaps one of the most daunting tasks in forming a financial plan. Almost every person whom you meet has some form of financial advice, which can be confusing. But, thanks to the world of the internet, you have the power to make informed decisions based on actionable insights.
Although investment options are tailored as per our goals, wants, and needs, there are certain financial instruments, which should be included in every portfolio. A fixed deposit (FD) is one such financial instrument offered by various banks. A lot has been said to date regarding this traditional financial instrument. Even in light of this, a fixed deposit is still one of the smartest investment choices that should find a place in your investment portfolio.
Whether you are contemplating your first step in FDs or you are an experienced investor, here are a few reasons why you should invest in fixed deposits:
Low risk
One of the safest and oldest investment options provided by financial institutions across India is the fixed deposit. There have been a few arguments stating that variable income instruments generate higher returns as compared to fixed deposits. Indeed, variable income investment options such as derivative instruments, mutual funds, and equity shares do yield higher returns. However, these instruments are associated with higher risks.
Their level of risk tolerance often guides the investment decisions of an investor. When aiming for higher returns, there is always an element of higher risk. This can cause a significant loss to the investor in adverse market conditions. An ideal investment portfolio should be a mixture of risk-free and risky instruments as per the level of risk tolerance of an individual. Wealth management experts assess your levels of risk tolerance, investment goals, and help you make informed decisions.
High security
Safety and low-risk are the parameters to look out for in investment options when you have a low-risk tolerance level. Companies such as ICRA Limited provide ratings for financial instruments based on the safety of funds. The ‘MAA+’ is the highest rating for public deposits offered by ICRA Limited. The rating of ‘MAA+’ for a financial instrument indicates that it has the lowest credit risk. Searching for a fixed deposit, which has the highest interest rates with an ICRA rating of ‘MAA+’, is a smart way to diversify your capital without compromising on returns.
Tax-saving
Investors can opt for tax-saving fixed deposit variants, which are provided by all banks. Such an investment will allow you to bring down your taxable income. This also reduces the tax to be paid. Individuals can invest up to INR 1.5 lakh in a tax-saving FD, and this investment can be declared under section 80C of the Income Tax Act or 1961. Such schemes or fixed deposit options have a five-year lock-in period associated with them. Premature withdrawals from this option are barred except in case of the untimely demise of an investor.
The higher interest rate for senior citizens
Senior citizens in India are awarded higher interest rates on their investments in fixed deposits. Almost all non-banking and banking institutions across the nation follow this suit. Senior citizens receive a preferential interest rate which is 0.25% to 0.65% ahead of the traditional interest rate offered for fixed deposits.
The power of compounding
“Compound interest is the 8th wonder of the world. He, who understands it, earns it; he who doesn’t, pays it.” — Albert Einstein
Individuals can start early and increase their wealth over time with the effect of compounding. Compound interest can assist a small investment to turn into a large sum over time. There are two ways in which interest earned in fixed deposit is paid — cumulative and non-cumulative. In a cumulative deposit option, interest is accumulated over a while upon which further interest is earned (compounding effect). The interest is paid along with the principal amount to the investors upon the maturing of the investment option. Such cumulative deposit options are available with financial institutions at attractive interest rates, which can assist you in achieving your investment goals easily.
A non-cumulative deposit option is the opposite of the cumulative deposit option. In this variant of the fixed deposit, interest is paid to the investors at regular intervals.
These intervals are chosen by the investor/ depositor themselves and can be as follows:
- Monthly
- Quarterly
- Half Yearly
- Yearly
Individuals looking for a regular income are better suited to the non-cumulative deposit option. On the other hand, individuals who have recently begun their professional journeys are advised to invest in cumulative options for higher returns. This will allow the power of compounding to work for them.
Availing a loan against a fixed deposit
Fixed deposit holders have an option to avail of a loan against their investments, as opposed to taking an unsecured loan which comes with a high-interest rate. Certain fixed deposits, have loan facilities that provide you with easy access to capital in the hour of an emergency. To avail of this facility, a minor rate of interest (0.5% to 2%) is levied. In this manner, an individual can avail of the facility of loan, without going through the hassle of unsecured loans. This also helps them to not compromise on their fixed deposit interest.
Easy to understand
As safe a fixed deposit investment is, it is equally simple to understand. For instance, an investment of INR 1 lakh at 7.5% interest would yield a profit of INR 7,500 (compounding quarterly). Stock market fluctuations will not drag this profit down. Unlike investment instruments such as equity shares, there is no requirement to monitor your investment in a fixed deposit continually. There are no market-related ‘highs’ and ‘lows’ involved in a fixed deposit investment.
Conclusion
Fixed deposits are suited to fulfill all your needs, be it the comfort of benefits and returns, surety, or security. These aspects, hence, make fixed deposits a no-brainer to be included in one’s investment portfolio. Banks have fixed deposit schemes to serve the investment goals and risk appetite for different types of investors. Whether you have a low-risk tolerance level and want a safe and secure way of earning returns, or you have a high-risk tolerance level and wish to cap your investment, fixed deposits are the way to go! Start a fixed deposit now, to earn secured returns!
