What are The Main Reasons to Invest in a Fixed Deposit?

With so many high yield investment instruments available, what reasons would you have to still invest in Fixed Deposits? Read on to know more.

Investments are made in order to make funds grow. There are many ways to achieve this end, depending on your age, earnings, and of course your income and expenditure. You can invest in the share markets, in debt funds, or debentures to name just a few. Other options include real estate, Systematic Investment Plans, and Mutual Funds.

All these have the potential to provide you with high returns on investment but come with risk. Fixed Deposits have minimum risk as a stable and fixed return is guaranteed. Here are some reasons to invest in FDs even today.

Fixed Deposits as an Investment Option

Bank and NBFC fixed deposits earn you very little in terms of interest. Yet, they offer immense benefits like:

Safety

Banks and NBFCs are governed by the RBI. They operate under strict norms and customers have minimal risk to deal with in case of FDs.

Good Short Term Investments

You can go for one year to five year deposits, though the maximum tenure can be upto 10 years. You can ladder the deposits, splitting up your funds into 1 year, 3 year, and 5 year deposits each with different Fixed Deposit Interest Rates, for instance. So, each deposit will mature at different times and you can for any purpose you want.

Tax Saving Option

You can choose to invest in Tax-Saving Fixed Deposits, which are offered by most banks and NBFCs. These special FDs help you take advantage of the tax benefits offered under Section 80C of the Income Tax Act. The principal amount you invest can be claimed for tax deduction purpose. The maximum amount you can claim for exemption is Rs.1.5 lakhs.

Liquidity

Fixed deposits are comparatively liquid investments. Other than a few schemes like the Tax Saver FDs, you can easily break an FD before maturity if you need the cash urgently. This will incur a penalty and you will lose a percentage of the interest if you do this, but you can still get access to the cash resources in these deposits.

If you don’t want to break the FD before tenure, you also have the option of taking a loan against it. You can get upto 90% of the deposit amount as loan. Also, you will be paying much lower interest rates and these loans involve no prepayment penalty.

Income Source

If you depend on your investments as your main source of income, you can arrange for monthly or quarterly payouts of the interest earned. This income stream can help you meet your essential expenses. This is ideal for housewives and senior citizens who do not have pension income. Interest rate is actually higher for senior citizens in most Fixed Deposit Plans.

Compounded Earnings

If you don’t need the periodic interest payouts, opt for a compounded FD. Here, you can choose monthly or quarterly interest and reinvest the amounts, increasing your potential earnings on the deposit. Each time the interest is added, it increases the principal, and interest is calculated on the new amount. So, your interest earnings are actually more even if the interest rate remains the same.

Despite low interest rates, Fixed Deposits are actually quite great investment options, offering security and liquidity.