Indians prefer fixed deposits because they offer fixed and assured returns on their investments. Basically, you know what you will receive at the end of your tenure. Therefore, it becomes easy to trust and helps you plan your investments accordingly. Be it any financial goal, and when you want a guarantee on your hard-earned money, then a fixed deposit is the choice in India.
For most Indians, it is a traditional investment instrument to park their savings in FD. As per the SEBI survey, 95% of the Indian families prefer investing in bank FDs as they are not market-linked instruments, and less than 10% were keen on investing in mutual funds or stocks.
If there are no options that give assurance of returns, then most of us would not invest. Thus, if we had a surplus left over at the end of the month, we would keep the surplus untouched. However, a fixed deposit is a channel to invest that ensures –
- It provides predetermined returns along with the safety of the principal amount.
- People can park their money without any concerns about returns or market volatility.
Additionally, when banks offer fixed deposits, they give you an option to receive interest periodically or at the time of maturity. Hence, FD is a great tool to help you mobilise your savings. Also, investors who only look for guaranteed returns and have a very low understanding of risk, then FD is a suitable option for them.
Why do people choose Fixed Deposits?
Fixed Deposits are easy to understand
When it comes to investing, most of us follow in our parent’s footsteps. Also, fixed deposits were popular because people easily understood them. You don’t need financial expertise to invest in an FD. It is simple where you have to invest your money, and you will receive a fixed interest on the principal amount, thus making your money grow.
Fixed Deposit is a convenient option
Fixed deposits are the most accessible investment option for people now or even earlier. You can simply open an FD account online through net banking or visit the nearest local branch.
Fixed Deposits offer safety of capital
In India, there is traditional importance attached to the safety of capital, which is why the fixed deposit is one of the most preferred options. Also, most Indians opt for safety first and then return.
Fixed Deposits are flexible
The beauty of FD is that you can choose to invest in the short term (like 7 days or more) or long term (up to 10 years), depending on your financial need. Also, you can invest in multiple FDs with different tenures at the same time. Furthermore, they are also very liquid, where you can withdraw anytime in case of a financial emergency.
5-Year Fixed Deposit
If you are looking to get tax benefits, then investing in a five-year tax saving FD is the right option. It allows a tax deduction for up to Rs.150,000 under Section 80C of the Income Tax Act, 1962. However, premature withdrawal is not allowed from these FDs.
Senior citizens favour fixed Deposit
Senior citizens traditionally prefer fixed deposits because, at this age, they prefer safety and guarantee of returns. Also, along with the benefits, they get an additional benefit of investment with an increased interest rate. The additional fd interest rate for senior citizens is between 0.25%-0.75% above the regular FD rate.
Is Fixed Deposit a Best Investment Option?
Do what is right rather than what is easy. Even though a fixed deposit is a popular choice among Indians, it is not always the right choice for all your financial goals. Here’s why –
Low Rate of Return: When compared to other investment instruments like mutual funds or equity, it offers a lower rate of interest. When you want to build a corpus in the long term, then a fixed deposit cannot really meet your requirement unless you invest a considerable amount today.
For example – On average most banks’ FD rate is up to 5%. Considering where most of us can invest 5000 or 10000 per month, the wealth created will not be much with this rate of return. But why do we need a higher rate of return?
Inflation rate: The return that FD provides is just 1% to 1.5% above the current inflation rate. This indicates that your money is not really growing.
Taxation: The interest earned on FD is fully taxable. Therefore, if the interest earned is above Rs.10,000, the bank automatically deducts TDS at 10%. Also, the returns will effectively reduce post-tax.
Knowing the above reasons, it does not really matter if your money is ‘safe’ because it will not be sufficient to meet your financial goals unless you invest a large sum of money.
Since there is so much trust in a fixed deposit, people often forget to evaluate other alternate options available for investment. These alternative options can help them build a diversified portfolio in different asset classes based on their risk and financial goals. Although there are multiple benefits of investing in a fixed deposit, this can definitely be a part of your investment portfolio and not the entire portfolio.