In this article we are going to discuss about the Bank Fixed Deposit and also the pros and cons related to it. Fixed Deposit is a financial investment scheme offered by banks and Non Banking Financial Companies (NBFC) that provides higher rate of interest than a normal saving accounts until a given maturity date. The rate of interest paid differs depending on the investment amount and tenure of the investment. A Fixed Deposit is one of the most popular investment option in India since people have more faith on banking solutions rather than stock market. Several people consider fixed deposits as the best investment option and put a significant portion of their savings in it.
Advantages:
Assured returns: The major reason of investing in Fixed Deposit is its guaranteed returns. Unlike investment in the stock market or commodity market, fixed deposits are not risky investment as they do not rely on fluctuating market rates. Investors could be confident that their investment is safe and secure and they will receive their guaranteed returns at the end of the investment tenure. Banks usually publish the fixed deposit rate of interest on their website and in bank branches, making it easier for customers to calculate their returns. Many banks have a fixed deposit interest calculator on their websites where a customer can calculate how much interest he/ she is going to get on investing a particular amount of money for a certain period of time. This is one of the main reason why a large number of senior citizens and others prefer to deposit majority of their savings in FD.
Flexible Tenures: The Tenure for fixed deposit is flexible and depends on the investor. Each Bank has its own minimum tenure rules though the final decision rests on the depositor. Majority of the banks will allow you to deposit your money for minimum 7 days even. The maximum tenure of FDs varies from 7 to 10 years depending on your needs. You may invest in FDs for a tenure that matches your business or personal requirement. You may open multiple Fixed Deposit account in the same bank at the same time for same or different period of time. This ensures safeguard of your money and gain fair returns.
Flexible Payment: FDs allow you to choose how to receive interest. Interest can be paid at different intervals depending on the term you choose. Interest rates are paid at maturity, annually or monthly. With monthly, annual or periodical pay out you can make sure that you never run out of the cash which you may be in need.
Loan against Fixed Deposit: An FD is a reliable option to keep in case of financial emergencies. If you are in monetary crisis , you may apply for loan against your existing FD(s) instead of prematurely closing your FDs and facing penalty and loss of interest. You may avail upto 90% to 95% loan against your existing FD amount, depending upon the rules and regulations of the bank. This makes it a dependable investment.
Easy to withdraw: An asset can be called liquid when you can easily convert it into cash without any difficulties. FDs are liquid, as you can withdraw the deposited amount at anytime you please. For premature withdrawals, banks may charge a small amount of penalty. Therefore, you always have a certain sum of money to count on.
Better Earnings: The interest rate of fixed deposits are usually higher than normal savings account. The interest rates differ depending on the maturity period of Fixed Deposit. Generall, the interest rates for FDs with longer tenure is greater than savings accounts.
Higher Interest for Senior Citizens: One of the main causes of investing money into Fixed Deposits for senior citizens is due to high rate of interest in compare to interest on FDs for general citizens. Majority of banks offer at least 0.25% additional interest on FDs for senior citizens.
Risk Free: Other Financial investments like mutual funds, gold, etc. can provide high returns but they can be risky. To balance that market risk, one may simply invest their money in Fixed Deposits. Investment on FDs can put you at peace of mind as it offers fixed income without any risk.
Helps in Emergency Crisis: When you are in need of money especially at the time of emergency, FDs can be a great friend. Most banks offer loans against Fixed Deposits. FDs can be closed prematurely with some nominal penalty charges. Some banks even offer partial withdrawals of FDs as well.
Tax savings: Banks are not allowed to deduct tax on any interest until it crosses Rs. 40,000 and Rs.50,000 for senior citizens. This means the bank will not deduct any tax unless the total interest earned by a customer on different fixed deposits totals Rs. 40,000. This provides relief to small depositors. If the tenure of a FD is five years or more in that case interest earned on that FD are tax exempted under the section 80C of the income Tax Act upto 1.5 Lacs. FDs are widely used as tax savings option by both salaried individuals and the business persons.
Joint Fixed Deposits: It is another great thing about fixed deposits that you can have a joint fixed deposit along with your spouse, children or parents; where anyone can withdraw the money upon maturity in case of primary depositor is not available at that time. However, it must be kept in mind in case of premature withdrawal or application for a loan against FD, all FD bearers must sign the application form.
Saving Habit: Fixed Deposits enables people developing a habit of saving money. When you invest a specific amount of money in FD, that amount cannot be used unless you withdraw it or it matures. This motivates the saving habit of a person. FDs can help you to grow a habit, where you will not be tempted to spend your money lavishly and learn to manage your finances more effectively.
Easy account opening: The greatest benefit of investing in Fixed Deposits is that you can open a FD account at any time and the application process is pretty simple. If you have online banking, opening a FD account is matter of a few clicks. Any savings bank account holder can approach the bank and open FD account after filling a form.
Automatic Renewal: FDs can also be renewed automatically, where you do not have to keep track of your maturity dates unless you are in need of money. So, if you have some extra money, you can open a FD account and opt for auto renewal.
Disadvantages:
Lower Interest Rates: Although FDs always offer higher rate of interest than normal savings accounts; however it does not match the rate returns on investments such as property, shares, bonds and mutual funds.
While fixed deposit may give all round protection against confusions but they provide poor protection against inflation. Current inflation rate was 6.70% as of May, 2019; That means as of May, 2019 your money gets devalued at rate of 6.70% every year. For an example, If your fixed deposit interest rate is at 6.50%, then value of your money has practically decreased by 0.20% (i.e. 6.5%-6.7%=-0.20%). If you are someone who can afford to take some risk, then you might go for some risky alternatives, which may provide you better returns compare to fixed deposit.
Locked in Funds: Fixed Deposits locks your funds for a certain period. The amount stays locked in with the bank or NBFC for a long period. When you investment in the bank as FD, it remains there for month’s or even years, Therefore, you cannot access them daily and cannot use them unless it matures. If you want to withdraw the money in advance before maturity period, especially in case of your sudden financial need, you will have to bear losses as penalty charges and loss interest period. If you open the FD account from your local branch, it could be tough to withdraw your fixed deposit at a short notice.
Fixed Interest Rate: The interest rate of fixed deposit does not increase for the entire duration of the period. The rate of interest never increase even if the bank increases rate of interest for FDs after the FD is opened.
Not Entirely Tax Free: Interest on your fixed deposit is not entirely tax free. Interest on fixed deposit is taxable under the head income from other sources in addition to your other incomes. If the FDs maturity dates are less than 5 years from the date of opening, in that case the interest is taxable if it exceeds more than Rs. 40,000 for everyone and Rs. 50,000 for senior citizens. In case of interest exceeds Rs.40,000 and Rs. 50,000 for senior citizens 20% TDS would be deducted by the bank. In order to avoid the same you need submit 15G and 15H if you are a senior citizen.
Loss of Interest: Another major drawbacks of fixed deposits is that you are investing your money for a fixed period of time and at a predefined interest rate, the rate of interest will not change during the tenure. But if the interest rate on FDs goes up, you may end up getting low rate of return compare to the return. To avoid this issue, you can choose to deposit money for a shorter duration instead of a long term. For example, you could opt for one year fixed deposit instead of five years. But, please keep in mind that FDs which have maturity period of less than 5 years are not eligible for tax deduction under section 80C of income tax act.
Penalties on Premature Withdrawal: You should choose the duration of your investment right before investing in fixed deposit. If you decide to withdraw your fixed deposit either completely or partially before it matures, you will have to bear a penalty as directed by the bank.
It’s not exciting: Unlike other investment methods, fixed depositing are safe and secure which makes it somewhat boring and unexciting for many investors, as there is no learning opportunity or risk factor. As investing in FDs does not require any market risk or any research about the bank’s financial stability or performance.
After thoroughly analyzing the pros and cons of fixed deposit account, it is crystal clear that this is an option for the people who do not want to take any risk at all. If you are a kind of person who seeks to get fixed income in his/ her account, then it is highly recommendable for you. The rate of return from this type of investments are limited. However if you are a person who seeks thrill, adventure, risk and learning opportunities and higher rate of return you should definitely select riskier investment methods. So make a wise decision before investing on fixed deposit with the bank.