What are the Benefits of Investing in Fixed Deposit? 

Introduction 

In a world of constant innovation, where financial products and investment models evolve rapidly, having a familiar and reliable tool in your portfolio can offer more than just peace of mind. Fixed deposits are one such option. As a type of term deposit, they provide guaranteed returns over a fixed period. Along with helping you meet your savings goals, fixed deposits also add stability to your overall financial plan. 

Let’s explore some key fixed deposit benefits in this article.  

Key benefits of fixed deposits 

Here are eight fixed deposit benefits you should know:

• Simplicity of use: Fixed deposits are easy to use. The process of opening an account, interest calculation, and redemption at maturity is straightforward and can be done either online or offline through a bank, Non-Banking Financial Company (NBFC), or post office.
• Low risk: Fixed deposits are low-risk investment vehicles that are not linked to market conditions. They offer financial stability, and their returns are not affected by stock market fluctuations.
• Assured returns: Fixed deposits offer guaranteed returns as decided at the time of account opening. The return remains fixed throughout the term and is paid out at maturity, unaffected by external factors.
• Superior interest rates for senior citizens: These deposits offer better growth for people over the age of 60. Senior citizens enjoy higher interest rates and can earn better returns compared to regular deposits.
• Loan facility: Fixed deposits can be used as collateral to take loans. You can draw a loan on fixed deposits to meet your financial needs without having to liquidate your deposit or other investments.
• Tax benefits: Fixed deposits offer tax benefits under different sections of the Income Tax Act, 1961. Under Section 80C, you can claim a tax deduction of up to ₹1.5 lakh per annum on five-year tax-saving fixed deposits. Additionally, senior citizens can claim a deduction of up to ₹50,000 per year on interest income earned from a fixed deposit under Section 80TTB. 
• Partial withdrawals: Some fixed deposits allow partial withdrawals without penalties, helping you cater to your unplanned expenses. However, others may charge a fee. So, it is advised to check the terms before investing.
• Auto-renewals: Fixed deposits often offer the option for automatic renewal at maturity, which helps you plan for your long-term goals. However, you must verify whether your bank, NBFC, or post office provides this facility. 

Comparing fixed deposits with other investment options  

Despite the many fixed deposit benefits, it is important to compare them with other investment options. This can help you understand whether they suit your financial needs or if you should take a more diversified approach to building or preserving wealth. Here are some alternative investment options you can consider:

• Savings accounts: Savings accounts share some similarities with fixed deposits. They can be opened easily at a bank, offer high liquidity, and allow you to withdraw money from Automated Teller Machines (ATMs) or use online transfers. However, the interest rates are generally lower than fixed deposits. Still, they can be suitable for storing emergency funds and short-term savings due to their flexibility.
• Debt mutual funds: If you are looking for a low-risk alternative, debt mutual funds may be suitable. These funds invest in fixed-income instruments like Treasury bills, government bonds, certificates of deposit, etc., and may offer slightly higher returns than fixed deposits. However, because they are market-linked, they carry some level of risk. Therefore, it is important to be mindful of market conditions and your own risk appetite before investing.
• Senior Citizen Savings Scheme (SCSS): SCSS is another low-risk option. Backed by the government, it offers attractive interest rates and tax benefits under Section 80C. The maturity period is five years, and it is only available to senior citizens, not younger investors.
• Recurring deposits: These work similarly to fixed deposits but with one key difference - you invest a fixed amount regularly instead of a lump sum. Recurring deposits offer guaranteed interest rates and are suitable if you want to build savings gradually with consistent deposits.
• Public Provident Fund (PPF): This is a government-backed long-term savings scheme that offers tax benefits and stable returns. However, PPF has a 15-year lock-in period, which limits liquidity. Returns are usually higher than traditional fixed deposits, which makes it a good alternative for long-term wealth building. 

Before selecting any of these options, it is important to compare their potential returns with those of a fixed deposit. A fixed deposit calculator can be a handy tool for this. It allows you to evaluate returns easily without getting overwhelmed by complex calculations. 

Tips to maximise your investment in fixed deposits 

Here are some things you can do to get the most out of your investment:

• Keep a long tenure: Interest rates on fixed deposits are typically higher for longer durations. If you do not need immediate access to your funds, choosing a long-term deposit can help you earn better returns.
• Choose a reputed institution: Although fixed deposits are low-risk, it is still important to invest with a well-known and financially sound bank or NBFC. This reduces the risk of default and ensures the safety of your capital.
• Understand the terms and conditions: The terms and conditions for a fixed deposit can differ from institution to institution. For instance, many organisations charge a penalty for premature withdrawals, while others may not. Make sure to read the terms carefully, especially if you might need to access your money before the maturity date.
• Compare interest rates: Interest rates can vary across banks, NBFCs, and post offices. Comparing rates from different institutions can help you select the one offering the highest return for your investment.
• Follow a ladder strategy: Fixed deposit laddering refers to investing in multiple deposits with varying maturity dates. This strategy offers better liquidity by allowing you to generate a regular income stream over a period. This way, you can avoid withdrawing a long-term fixed deposit prematurely.  

Conclusion 

With so many fixed deposit benefits, they can be a competent tool in helping you achieve your financial planning goals. However, it is important to compare their returns with other investment options to ensure they align with your financial needs. Additionally, remember to adopt the right strategies, as highlighted above, to maximise the returns from your fixed deposits.