Is Fixed Deposit the Most Attractive Investment Option?

There are plenty of great investment options for Indians, including mutual funds, gold bonds, real estate, public provident fund, and national pension service. Different options might be attractive to different people depending on their age, risk appetite, and requirements. If numbers are to be believed, one of the most attractive investment options for Indians is a fixed deposit. In 2017-18, 57.7% of all deposits made in banks were fixed deposits, according to information provided by the Reserve Bank of India.

So, what makes fixed deposits an attractive investment option? Here are some of the reasons:

One of the most significant benefits of fixed deposits is that they can be extremely secure. Since fixed deposits are not dependent upon market conditions, the returns are guaranteed. The FD interest rates stay constant throughout the tenure of the investment. Plus, after the passing of the 2020 Union Budget, all fixed deposits in cooperative and commercial banks have insurance of up to ₹5 lakhs by the Deposit Insurance and Credit Guarantee Cooperation (DICGC). With this insurance benefit, the fixed deposit option becomes even more safe.

Fixed deposits offer good interest rates as well. The interest rates are generally higher than the inflation rate, making it a good investment. Plus, certain banks like ICICI HFC even offer an additional 0.25% interest rate for senior citizens fixed deposits. To know how much, you can earn from a fixed deposit, you can use an FD interest rate calculator.

Fixed deposits enable you to take advantage of compounding, which means that you can reinvest the interest generated from your FD, instead of withdrawing it. With compounded fixed deposit option, you would earn interest on the principal as well as the previously generated interest.

In case the interest earned from fixed deposits is less than ₹40,000 during a financial year, you would not need to pay any TDS. For senior citizens, the upper limit is ₹50,000 during a financial year. But to get this benefit, senior citizens would have to fill and submit Form 15H at their bank branch. Others would have to fill and submit Form 15G.

Although FDs are for a fixed tenure, it does not always have to be this way. In case of emergencies, you can prematurely withdraw from your fixed deposit by paying a small charge taken as a deduction from the interest rate. The charge depends on how early into the tenure you want to make the withdrawal. The FD charges can vary from bank to bank but is generally 4% if the withdrawal is made three to six months into the tenure. The deduction is around 2% for withdrawals six to twelve months into the term. For withdrawals after one year, the deduction is around 1%.

With fixed deposits, you get flexibility in terms of tenure and payout. You can choose a tenure as short as one year to up to five years. You can also choose to receive the interest rate monthly, quarterly, half-yearly or annually, or even at maturity.

Apart from these, fixed deposits also encourage a habit of saving. Plus, opening them is quite easy. All in all, fixed deposits serve as a safe and guaranteed return scheme which is suitable for both short-term or long-term investment horizons.