Fixed Deposit Account
Fixed Deposit Account is a term that our generation is aware of, primarily because it was a popular mode of investment during our parents and grandparents time. Fixed deposits are also called as Term Deposits, the deposit is made for a certain period of time or “Term”, and assured returns are guaranteed when your term gets over.
Fixed deposits traditionally were attractive due to a higher rate of interest and the relative security it provided, in terms of assured returns. But over the years rate of interest for fixed deposits have been steadily declining. Today the rate of interest for Fixed deposit accounts ranges from 4% to 7.5% depending on the bank that you choose.
There are advantages and disadvantages associated with Fixed deposits, they are given below.
Advantages of Fixed Deposit Account
1. Safe investment and assured returns
Fixed deposits are low-risk investments they offer a much better rate of interest than savings accounts. Savings accounts generally offer a rate of 3.5% to 6%. The returns from fixed deposits are assured.
2. Fixed Rate of Interest
The rate of interest for the period that your investment is locked in remains fixed, irrespective of any changes or notifications. Although the rate of interest can be revised on a yearly basis, your investment remains fixed at the same rate, for the period you have invested.
3. Source of Emergency Funds
Fixed deposits have high liquidity, meaning that they can be withdrawn, anytime even in between the term period. Thus, it is useful to use in emergencies, you can also borrow money against your fixed deposit, banks allow loans of up to 90% of the amount deposited.
4. Period Level Flexibility
The Time period for which your amount can be deposited can vary. Banks allow money to be deposited for a period of 7 days to up to 10 years. Also, you can make multiple fixed deposit accounts in one go, depending on your goals.
Disadvantages of Fixed Deposit Account
1. Reducing Interest Rates
Fixed deposits are no longer the attractive investments they once were, Interests rate have been steadily declining over the years. Also, high inflation means that the amount you earn from fixed deposits is not sufficient to cover expenses.
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Interest earned from fixed deposits are not tax-free, it is taxable if the interest earned is more than Rs. 10,000. TDS is applicable to the tune of 10% of interest earned.
3. Penalty on Premature Withdrawal
If money is withdrawn before the term period of the deposit gets over, a penalty is charged.
The penalty usually entails a lowering of the rate of overall interest, which means you stand to lose money.
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4. Opportunity loss
Fixed deposits provide assured returns at a reasonable rate but they are still lower than many attractive short-term plans, which can provide much better returns at better rates.
Fixed deposits still are a popular and attractive form of investment, but its pros and cons have to be weighed carefully before taking a final decision on investments. In the coming alternative modes of investments shall gain popularity, primarily due to falling rates of interest. Change in spending and saving habits and the overall change in social trends and behaviour may force investors to look for alternatives.
Many investment companies are offering better short-term financial plans with better returns. These investments carry more risk than fixed deposits, but people today are ready to take more risk, due to better economic conditions. For now, fixed deposits are here to stay as a good investment alternative.