A fixed deposit (FD) is one of the best investment products you can include in your portfolio. It is reliable, safe, steady, and simple, even for new investors. Best of all, it is a tried and true method of growing your money despite market volatility.
One of the primary advantages of investing in an FD is that you may make a lot of money. This is because of the interest rate. This rate is greater than the interest on savings accounts and a few other alternatives.
As an investor, you need to consider the pros and cons of an FD to make an informed selection. The benefits and drawbacks of a fixed deposit are listed below:
What exactly is an FD?
An FD is where money is placed at the start of a period, and interest is earned before it is credited and saved at the end. It is similar to a savings account. In this, the account user has to invest money once and receive returns for the amount funded.
The accrued interest is credited to that account, and interest on interest is also supplied. This process is known as a compound of interest. After the deposit term, the investor or account holder receives the money deposited plus any extra interest collected throughout the year.
Features of Fixed Deposits
Now that you know what fixed deposits are, let’s look at some of their features:
- Fixed interest rate
This is among FD’s greatest features. A fixed deposit is among the most reliable and safe new assets for anybody seeking to begin their money journey. Its rewards are new by market volatility.
FD investments are completely safe. Rates are not affected by market fluctuations. The interest rate on an FD plan is fixed for the length of time until it matures.
- Exempt from tax
The initial monetary amount the depositor places in the FD is tax-free under Section 80C of the Internal Revenue Tax Act. FDs are a popular tax-saving option for salaried people, workers, and salaried people, employees, and stockholders. The clause provides an exemption of up to Rs 1.5 lakhs for FD deposits.
- Renewal and Term Flexibility
You may start your fixed deposit for as little as a week and as long as ten years. Yet, before selecting any fixed deposit plan, remember to verify the interest on FD. The rate of return is mostly defined by the fixed deposit term.
Fixed deposit perks
The rate may not be higher when compared to equities mutual funds or stock market holdings. But bank FDs provide safety in terms of low risk compared to those other business investment options. They also ensure capital returns at maturity. Here are some of the advantages of fixed deposits.
- Payments of interest
Based on the consumer’s needs, interest payments might be set monthly, quarterly, or yearly. It may also be renewed at maturity with the principal sum to continue as an FD.
- FD with tax breaks
Tax-saving fixed deposits are also qualified under Section 80c Tax Act. One of many investment options within 80C gives a Rs 1.5 lakh income deduction. Tax-saving FDs have a 5-year lock-in term.
- Deposit safety
According to the latest update of the DICGC Act, an account holder can get coverage up to Rs 5 lakh within 90 days after a bank (except NBFC) is restrained due to an unusual closure of business.
- Senior persons get a tax break
FD income paid by a senior individual is free up to Rs. 50,000 from income tax. Senior folks’ deposits also get greater interest rates.
- Loan secured by a bank FD
Loans against FDs are available. Almost all banks provide this option. The deposit amount and the term of the FD determine the loan. The rate on such a loan might even be as much as 10%.
- Several FDs may be opened
One may open an endless amount of FDs at a single or many banks. The FD is a perfect option to invest one’s savings. The earned would be tax-free till it hits the Rs 1.5 lakh exemption limit.
- Credit facility
A savings account may also be utilised to get a loan. The lending facility enables the depositor to get funds when they are needed. The loan may be extended to cover up to 90% of the debt plus interest.
- Senior Citizens Get Better Rates
Senior citizens benefit from even higher fixed deposit rates. Interest rates may vary according to the bank selected and the duration of the FD. It might be as much as 10%. As a result, older adults may earn much more money via deposits. This s exactly what they want and desire in their golden years.
- Starting a Single or Joint Account
A joint account allows two or more people to create an FD jointly. Any account member can deposit or withdraw funds from the account. This simplifies the operation and maintenance of the FD accounts.
- HUFs are accepted.
Members of any Hindu family may create an HUF and open a Fixed Deposit jointly. HUF is taxed differently (from individual family members). So a family may save more on taxes by creating an HUF FD account.
Fixed Deposit Drawbacks
While some plans offer help, they also have downsides. Assess the following flaws of FD:
- Funded money
Your cash will be trapped in a fixed deposit for a certain period. To convert your money, you must go through a separate procedure. As a result, until you remove your cash, this money will be unavailable to you.
- Exiting penalties
If you withdraw money before the term is over, you may be assessed a penalty for pre-closure. The interest income so far may also be removed before crediting the principal amount.
- Fixed interest rate
FDs offer many benefits. But the rate does not grow with inflation. The deposit may give less than the inflation rate in certain samples. And it is for this reason that investors are losing rates in fixed deposits.
In most cases, the rate on a fixed deposit is set throughout the deposit. As a result, they will not profit from increased interest rates if interest rates rise in the market.
Even those with a low-risk tolerance spend their money on FD, making it the most reliable and adequate financial tool. An FD is the only option in the market if you want a safe return without putting your funds at risk.
But, when investing in any market instrument, you should do some research and analysis. And for this, you can visit Piramal finance for more related blogs and explore their product and services.