If you have a surplus of funds in your hands, parking them in your regular savings account is not a good idea for the long term, as the return on investment (ROI) will be very low. Instead, you can consider options like shares, Mutual Funds and other such schemes. However, all of these involve a certain degree of risk to your investment. Fixed Deposits, on the other hand, are highly regulated instruments, so there’s much less risk involved.
Why should you invest in Fixed Deposits?
You can buy land, gold, or other assets and also invest in growth schemes like systematic investment plans and Mutual Funds. These offer higher returns on your investments. However, there’s still an element of risk involved. Fixed deposits have always been a solid and secure option for people looking for a safe way to park their extra funds while still earning an interest on the amount.
1. Fixed Deposits are comparatively safe
Bank and NBFC FD schemes operate under the strict rules and regulations of the Reserve Bank of India. The banking industry in India is relatively safe, and investors are assured of the safety of the principal that they have deposited in bank savings schemes.
2. Insurance of deposits upto Rs.1 lakh
Investors are offered insurance for Rs.1 lakh of the amount that they chose to save in FD schemes. While this might seem a bit low if you want to invest a huge amount, you can always consider splitting up the funds into smaller FDs and take advantage of the Rs.1 lakh insurance for each of the deposits. You can invest in your name, open joint FDs with your spouse, or open Fixed Deposits across different banks.
3. You are retired/senior citizen and want a safe investment option
If you’re retired or a senior citizen and don’t have any sources of steady income, an FD is one of the best investment options available. You can open a Fixed Deposits account across many banks and be assured of the safety of the principal you have invested. The interest rates might be low, but you still earn a little on your deposits, and you can close the FDs before maturity in the case of emergencies.
4. You can close FDs before maturity
Fixed Deposits earn you a higher rate of interest than a regular savings account because you agree to leave the principal amount in your FD account for a fixed period. Banks pay you higher interest rates for the ability to use your deposits as part of their cash flow. If you withdraw the amount before the agreed maturity period, they charge a penalty for losing the funds before time. Your principal will be unaffected, but banks will cut back on the agreed interest rate.
In an emergency, you can close most FDs before maturity, except schemes like tax saving FDs. There are other avenues you can consider rather than closing the FD. For example, you can take out loans on your Fixed Deposits. So, if you’re in a cash crunch, you can apply for a loan on your FD, which will come at a lower interest rate since you’re offering the amount in the FD as a collateral. You can also get a credit card issued on your FD account and use that to purchase any essential items without breaking your FD and losing out on the interest rates.
5. Tax saving Fixed Deposits
If you are willing to invest a part of your funds for a relatively longer period, you can consider opening a tax saver FD. Generally, these FDs are offered as a 5-year term deposit and the money is locked in for that period. You cannot break the FD before maturity and you cannot avail of loans or credit cards on these deposits.
In tax saver FDs, the principal amount you invest is exempted from taxation. The interest is taxable according to your tax slab. However, the principal amount upto Rs.1.5 lakh is eligible for tax deduction under Section 80C of the Income Tax Act. You can open tax saver FDs for amounts ranging from Rs.100 to Rs.1.5 lakh. You can open more than one tax saving FD in different banks. You can compare these FD schemes across financial institutions and choose the ones that offer the best features.
6. Senior citizens earn more
Senior citizens are offered certain benefits on their bank accounts. The fixed deposit rates for FD accounts opened by senior citizens is higher than for other investors. Senior citizens are also offered tax exemptions. If a senior citizen’s total annual mcome including interest rates on FDs does not exceed the tax-free limit, they will not be subjected to TDS by the bank on their FDs. However, they should provide the duly filled Form 15H to the bank to make sure that there is no TDS done on the interest accrued.
7. Earn More Through Compounded Fixed Deposits
Banks pay out interest on FDs at fixed periods – monthly, quarterly, or annually. You can get monthly or quarterly interest deposited in your savings account if you need the funds as regular income. If you do not need the funds, choose to reinvest the interest amount in your FD. The principal will grow and the interest for the next period will be calculated on the new amount, allowing you to earn more on your investments. Choose the monthly or quarterly interest payment option and choose the compounded FD option when you can, to earn more interest on your Fixed Deposits.
Fixed Deposits have a long tradition as a safe scheme for those looking for a secure investment option rather than high ROI. These deposits are governed by strict regulations and the investor is assured of the safety of their capital, and in most cases, of the interest agreed upon at the time of deposit. For people who have no other income source or very low income prospects, an FD is a great option.