Fixed Deposit Investment: The Complete Guide

Apr 29, 2022

Have you started saving money recently? Has someone advised you to open a fixed deposit account? 

Investing in an FD is perhaps the most common financial advice given in our country. This is maybe because FDs offer a fixed rate of return and are viewed as a superb option to save and grow your wealth. 

However, in recent times, the economic situation of our country and the world has evolved dramatically. We are living in unprecedented times and investment instruments that have been viewed as dependable may not really be so dependable now. 

But what’s wrong with FDs? The promise of a fixed return coupled with the ability to save tax makes them a lucrative option for many investors. However, the real picture is quite different from what you have been led to believe. 

At LenDenClub, our team is to helping you make profitable investments. That’s why we have decided to help you know about FDs to make an informed investment decision. 

Let’s begin right away:

 

What is a Fixed Deposit Investment?

The name “fixed deposit investment” explains quite a lot about what kind of investment it is. 

A fixed deposit investment requires the investor to invest a fixed, one-time amount with the bank of their choice. On this deposit, the investor gets a fixed rate of interest, which is usually between 2% and 6.90%. The exact interest rate usually depends on the tenure of the fixed deposit. While investors have the freedom to opt for tenure as short as a year, longer tenures pay out better interest rates. 

Having said that, there are a few other benefits associated with fixed deposits.

 

Should You Invest in Fixed Deposits? – 3 Underlying Benefits You Can’t Ignore

The promise of a fixed return is surely lucrative. However, it is perhaps not enough to make FDs the most preferred mode of investment in our economy. So what makes them so attractive? Here are a few other benefits of investing in an FD:

 

Tax Exemption

If an investor opts for a tax saver FD, they can save tax of up to ₹ 1,50,00 under section 80 C of the Income Tax Act of 1961. This is perhaps one of the best advantages of investing in a fixed deposit.

 

Health Insurance 

To attract more investors to invest in FDs, many banks nowadays are offering health insurance to holders of FD accounts. This is definitely a great benefit as health insurance premiums and healthcare become more expensive.

 

Overdraft Facility

FD account holders also have the freedom to use an overdraft facility in their savings accounts against their FD principal. Meaning, if you have invested in an FD and are ever in urgent need of some funds, you can have access to said funds using the overdraft facility, without ever touching your investment.

 

Pros and Cons of Investing in a Fixed Deposit

There is perhaps no investment instrument that only offers benefits, and FDs are no exception to this rule. Let’s paint an unbiased picture of FDs by looking at the pros and cons associated with them:

 

Pros Of Investing In An FD

 

Fixed returns: This advantage of investing in FDs has already been discussed at length. 

 

Safety: FD returns are backed by a bank guarantee. Your investment is further ensured by the Government of India in the case of bank failures. In such a case, each investor at each bank has been provided with an insurance cover of ₹ 5,00,000 on their investment.

 

Flexibility: Investors can choose to get their interest paid at the end of their tenure or can choose monthly payment of interest, whatever suits their needs. Similarly, many banks offer the ability to withdraw the FD principal amount before maturity, in the case of emergencies.

 

Access To Credit: If you haven’t opted for a tax saver FD, you can easily obtain a loan against your FD. The loan amount can be as high as 95% of your invested principal. 

 

Cons Of Investing In An FD

 

Long Tenures: In order to get the higher FD interest rates, investors are to make a long-term investment of up to 5 years. This may not sit well with investors that are looking for short-term gains.

 

Penalty For Premature Withdrawals: If in case of an emergency, you decide to withdraw your principal amount, you will be charged a penalty. For most banks, this penalty is equivalent to 1% of the invested principal amount.

 

Low Returns: Fixed returns are great, but in the case of FDs, they’re not too great. In fact, in 2022, FD returns are not enough to combat the current inflation rate. As mentioned earlier, most investors get between 2% and 7% interest on their FD. However, it is worth noting that if you are not a senior citizen, you will not get more than 6% interest on your FD, regardless of how long your chosen tenure is. Looking at the fact that current inflation in our country is over 6.50%, and that FD returns are taxed, it becomes clear that many investors may actually be making losses in FDs, despite the promise of fixed returns.

 

Understand the Role of NBFC in Your Fixed Deposit Investment

There was a time when besides banks, the only organisation that was offering a fixed deposit facility was the Indian Post Office. However, nowadays, non-banking financial institutions also offer FD facilities.

 

This is worth noting because a lot of these organisations are offering interest rates that are higher than what any major bank is offering. While this may seem like a lucrative opportunity, and it is, you as an investor must remain careful.

 

That’s why, in order to safeguard their investments, investors must be careful and only invest with MAAA rated NBFCs. MAAA is a rating given by the Government authority known as ICRA and it tells investors that an organisation is and safe to invest in.

 

Is There A Better Option Than FDs?

As mentioned above, most FD interest rates are not able to beat the rate of inflation. This bothers most investors as it means that despite investing in an FD, investors may be losing money because of the high rate of inflation.

FDs offer principal protection, a proposition like none other. However, some  of these, like P2P investments on the LenDenClub app, offer good returns and are safer than market-linked investment instruments such as stocks. The LenDenClub app works by taking your investment and lending it to a borrower, similar to how banks work. The only difference is that the middle person, the bank, has been eliminated from the equation. This gives investors the benefit of earning higher interest rates. LenDenClub has had a consistent portfolio of 10 to 12% p.a.* for the past five years. P2P investment is recommended as a means of portfolio diversification, an alternative investment avenue and not as an alternative to fixed deposits.

To learn more about P2P investments, download the LenDenClub app today.

*On platform level.

 

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