Indian investors see bank fixed deposits (FDs) as a safe investment with stable returns and without too much risk. They invest in FDs for tenures of 7 days to 10 years in order to lock in interest rates at the time of investment. It does not matter if the market interest rates change later. This approach is better for investors than the volatile market-linked investment options such as stocks or bonds.
The assured returns from FDs appeal greatly to risk-averse investors anxious about market fluctuations. This article discusses the top reasons that make bank fixed deposits an attractive investment option for Indians.
Reasons Why You Should Invest in FDs
Here are the reasons why you should invest in FDs:
1. Attractive Returns Protect Income
Fixed deposits are attractive due to decent investment returns and securing returns at a fixed, predefined rate. The interest rate is typically up to 7.5%.
You lock in returns upfront at the time of FD booking, irrespective of later interest rate movements or market fluctuations. This provides investors with stability and income certainty.
2. Higher Interest Earnings than Savings Accounts
One major appeal that makes bank fixed deposits enticing for most investors is the possibility of earning relatively higher interest income than everyday savings accounts. Since routine savings bank accounts offer a yearly yield of up to 4.5%, fixed-term deposits can generate up to 7.5% annual returns for investors based on the period for which depositors commit their surplus savings.
For example, parking ₹10 lakh in a fixed deposit at a 7% annual rate fetches ₹70,000 in yearly interest versus just ₹30,000 yearly interest in savings accounts offering 3%. That’s over double the interest earnings.
3. Provide Excellent Flexibility and Accessibility
Modern fixed deposits provide tremendous flexibility to investors, making them convenient to invest in:
Comprehensive tenure options ranging from very short-term 7 days FDs to longer 5-10-year deposits
Flexible interest payouts – monthly, quarterly, half-yearly, annually or cumulative interest at maturity
Part withdrawal facility in case of interim liquidity needs
Overdraft facility against fixed deposit to avail loan of 80-90% FD value without breaking it
Further, most leading banks now provide the option to invest in fixed deposits digitally in a few clicks. Creating new FDs or redeeming proceeds at maturity has become extremely quick and convenient through online banking or mobile apps.
4. Avail Loans Against Fixed Deposits
An added benefit of fixed deposits is the flexibility to obtain loans against them from the issuing bank. Banks readily offer loans up to 75%- 90% of the FD value at interest rates approximately 2-3% higher than existing FD rates.
This loan facility allows investors to meet urgent funds requirements in a pinch while retaining the original fixed deposit investment. Customers can comfortably service the loan interest with other income sources and repay the loan principal once their cash flow improves.
5. Investment Diversification
Investing surplus capital in fixed deposits also serves as prudent diversification for investors during volatile equity markets. For risk-averse individuals, parking 30%-40 % of savings in safe, fixed-return assets like fixed deposits balances the overall investment portfolio across varied instruments.
For example, to balance risk-reward across market cycles, one may allocate 30% to fixed deposits, 50% to stocks and equity mutual funds, and the remaining 20% to debt funds or PPF/EPF.
Conclusion
Fixed deposits merit consideration in one’s investment portfolio mix due to benefits like assured returns that lend stability, the flexibility of tenure and payouts, liquidity through an overdraft facility, and balancing overall allocation.
The stability of a fixed deposit offset the volatility of other assets in your portfolio. Before locking in an FD, it's wise to use a fixed deposit calculator to figure out how much return you're looking at for your money. Based on your deposit amount, tenure, and interest rate, this tool will calculate your earnings and visualize what future gains might look like, so you can be sure that this investment aligns with your financial goals.
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