Fixed Deposit. What is it?
A fixed deposit is a way to invest your money with banks or non-banking financial companies. It’s like putting money in a special savings account that gives you more returns than a regular savings account.
Fixed Deposits (FDs) are a popular and low-risk way to save money. They provide a fixed interest rate on your deposit and offer tax benefits. FDs are easy to open, safe, and secure, allowing you to earn interest on your savings.
As the name suggests, fixed deposits have a set tenure. A consumer’s FD investment period may be short-term or long-term, depending on their investment portfolio. Different banks and companies offer different interest rates on fixed deposits. Compared to the returns from a traditional savings account, fixed deposits provide higher returns on the principal invested.
Investors in fixed deposits should keep in mind, though, that they cannot take money out before the deposit’s maturity without incurring penalties.
Perks of Investing in Fixed Deposits
Guaranteed Returns
With daily interest calculations and monthly payouts, fixed deposits (FDs) offer a fixed interest rate for the specified duration of the investment.
Liquidity
FDs are assets that have no restrictions on their transferability or withdrawal and can be readily accessed and used immediately. You can transfer money between banks in an emergency.
Flexibility
There are no penalties associated with withdrawing funds from fixed deposits at maturity. Moreover, fixed deposits can be pledged as security for loans or other financial obligations.
Safe Investment Mode
Fixed deposit investing is incredibly safe. There is almost no risk involved in this kind of investment choice. Even those without any financial background can make investments.
Prompt Return
A quarterly return on an investment in a fixed deposit is possible. There’s not a single delay in return. Reinvesting the return can be done in a variety of ways, such as by purchasing stocks, investing in startups, or meeting other financial objectives.
Weak Spots in investing in Fixed Deposits
Interest rate fluctuations
Interest rate fluctuations can affect returns, particularly during periods of inflation. There is no assurance that your interest rate will stay high for the term of your investment because fixed deposit rates are not guaranteed. Financial institutions keep changing their rate of interest from time to time depending upon the economy and market trends. During the period of investment, interest rates may rise or fall. A rise in interest rate causes a loss of return.
Lack of Liquidity
One issue with investments in fixed deposit accounts is that they can be challenging to sell. You commit to leaving your money in a bank fixed deposit account for a predetermined period when you invest. This usually means that you have to wait until the maturity period.
Moreover, there will be penalties associated with early withdrawals, which could reduce any interest you have already received on your investment.
No Tax Benefits available
Investment in fixed deposits does not provide tax benefits, which can be beneficial for investors. Tax-exempt returns help to accumulate wealth in the long run.
Loss of Opportunity Cost
Fixed deposit investments are thought to be less risky than other investment options, but you may lose out on opportunity if you choose to invest in other, riskier options like stocks, bonds, real estate, T-bills, etc. High risk, high return is well known
Superior choices compared to fixed deposits.
Investment in Corporate Stocks
Pros
Investing in stocks represents ownership in those companies. Huge profit potential. The value of stock can rise dramatically if the companies in which one owns stock perform well. Return from stock can be unlimited if rightly chosen.
Cons
There is very high volatility in the stock market. It is considered very sensitive. Prices are volatile and susceptible to changes in the market. Investment needs careful investigation and observation with proper time and effort.
Investment in Mutual Funds
Pros
Investment in mutual funds at lower risk is commendable. By pooling their funds, investors can invest in shares of different companies through an asset management company. Mutual funds invest in diverse portfolios of securities, bonds, and stock. Less risky than individual investment.
Cons
It attracts costs and fees. The asset management company charges certain management fees, which may affect the total return. You have to incur an entry load and exit load as expenses for the purchase and sale of securities.
Initial Public Offers (IPOs)
Pros
Investment in Initial Public Offers (IPO) offers investors an advantage to buy shares at face value as it’s going public for the first time. Low investment is required. Growth potential may be high as the company uses money for its growth and expansion, aiming for higher profitability.
Cons
Very high risk. New public companies may not have a track record. The company takes time to be profitable, as they are focused on growth and expansion, targeting to meet long-term objectives.
Investment in Real Estate
Pros
Ownership of tangible assets. Having property can result in both rental income and possible long-term value growth.
Cons
High initial outflows. Owning tangible property requires very manyfunds. Liquidity can be difficult.
Investment in Bonds
Pros
In a strong market, bonds yield higher returns. Bonds can be sold in the secondary market and have high liquidity. Diversification is possible.
Cons
Bonds are volatile and subject to market risk and issuer default risk as well. Interest rate changes may impact the bond value. Callable bonds before maturity may encounter reinvestment risk.
Conclusion
The most important part of anyone’s life is making committed plans for their future finances. Making plans for the future and ensuring you have enough money saved up to live comfortably in the future are important. As mentioned, there are a variety of ways to invest your money for higher returns; however, if you want to ensure the safety of your investment, you should think about investing in fixed deposits.
FDs are regarded as a low-risk, guaranteed-return option. They are appropriate for people who value security above all else and are prepared to commit their money for a set amount of time.
A balanced strategy for wealth growth may involve diversifying your investments across a range of markets.