For many, an FD is indeed the first choice when it comes to the thought of making an investment.
Fixed Deposits offer many benefits and security. Yet, before you make a decision to invest in a Fixed Deposit, it important to have a good understanding of both the advantages and the disadvantages of opening an FD.
Here is what you need to know:
Fixed Deposit – Advantages:
Security of Investment
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In the case of a Fixed Deposit, you can be completely sure that you will receive the promised returns. With strict regulations and policies, your investment in an FD remains safe. Notably, as per a policy by the Reserve Bank of India (RBI), the investment in an FD is insured against an amount of up to INR 1 lakh. This amount covers both the principal and the interest on it.
While other riskier investments like stocks or mutual funds may bring a loss, in the case of an FD, you are assured of getting fixed returns.
Loan Facility
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There may be situations wherein you are in urgent need of cash. Herein, you may choose to take a personal unsecured loan or withdraw money from the FD. Note that doing the latter will also attract certain penalty charges.
However, you have another option. You can also take a loan against your FD account. This loan can be for up to 90% of the FD amount. More importantly, as the FD acts as a collateral for the loan, the interest rates for this loan can be lesser than that for an unsecured personal loan.
Flexible Payment Terms
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With an FD, you can also choose the time intervals at which you wish the returns to be made payable. Usually, this time period can be yearly or monthly, according to what you choose. This ensures that you keep earning a certain amount of returns. This cash then becomes available for use and you can invest it elsewhere or for other expenses.
Fixed Deposit – Disadvantages
Low Returns
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The most important disadvantage of an FD is that the returns it offers can be very low in comparison to other investment schemes. Now, in such a situation, if the inflation is high, then any gains from an FD may be nullified due to the rising prices.
Losing other Investment Opportunities
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Besides the low returns from an FD, the amount invested also means a lost investment opportunity. The same amount if invested in stocks, mutual funds or gold could have helped secure greater returns. Moreover, the amount could have helped in creating a diverse investment portfolio that better secured an individual’s financial future.
Liquidity Crunch
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Note that you are not able to access the amount invested in an FD for the particular tenure of the investment. And if you decide to withdraw the amount, then you also have to pay the penalty charges for doing so. If you don’t, then there is a chance that you may earn a lesser interest on the FD.
Some financial institutions require you to not withdraw the FD amount for at least one year.
Tax concerns
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The returns from an FD are subject to taxation. If the interest earned is more than INR 10,000 in one financial year, then TDS of 10% is applicable. Now, to reduce the tax amount, you can consider having more than one FD account with one or more financial institutions.
Moreover, a tax-saver FD can also help reduce your tax burden.
Thus, an FD has its own set of advantages and disadvantages. It is important that you understand the implications of the same while making your investment decisions.