There's a reason why Fixed Deposits matter
October 22, 2020
In India, it is a very common financial advice: invest your surplus money in a Fixed Deposit account. Fixed Deposit or Term Deposit keeps your money locked in for a period of time and gives you a fixed rate of interest until its expiry, that is, until the FD ‘matures’. The rate of interest offered is higher than what your money would earn in a regular Savings Account.
Fixed Deposits are a safe and popular investment instrument. Their popularity is largely due to their appeal to cautious investors. Fixed Deposits are largely risk-free with assured returns and they help foster a good saving habit. Fixed Deposits can be used as a destination of investment, time and again.
Fixed Deposits can fill in spaces that market-based investments cannot. Here are a few reasons as to why they matter in your financial portfolio:
The first and foremost feature of investing in a Fixed Deposit account is that you get an assured return at a rate of interest that is predetermined. So you know exactly what return you will earn throughout the tenure of the Fixed Deposit. The rate of interest usually varies between 4.5% and 5.5% currently. While life is full of uncertainties, it helps to know that there is at least some assurance of returns on your investment.
Flexible interest payments
Fixed Deposits give you the option to choose how you wish to receive interest. This means that you can choose the frequency of interest payments either on a quarterly basis, monthly basis or upon maturity under the cumulative Fixed Deposits.
Flexible tenure of investment
Fixed Deposits also come with highly flexible durations - the Fixed Deposit account can be opened for as short a period as 7 days and can stretch for up to a decade.
Rainy Day funds
Most people look at Fixed Deposits as funds for the rainy days. This means that if an emergency strikes and you need money urgently, a Fixed Deposit account can be your financial saviour. How? For one, you can choose to close your account and withdraw all the money you have deposited in your FD account at any time. For premature withdrawals, you may be charged a premature withdrawal penalty on the interest rate applicable for the actual period of the deposit. If you do not want to distort the FD, you can choose to avail of an overdraft of up to 90% of the deposit.
Managing risk in a portfolio
By adding Fixed Deposits to your financial portfolio, you add a solid instrument that provides assured, steady returns. Its presence balances out the risky instruments such as Mutual Funds, Equity, Gold, etc.
Foster a habit of saving
The very first thing a Fixed Deposit account does is teach you financial discipline. You develop the habit of saving money by parking them in a Fixed Deposit account. You essentially lock your surplus funds in an FD - this prevents you from using the amount unless it is withdrawn or until you reach maturity.
The other categories of financial instruments seem a lot more exciting: instruments like Equity Shares, Mutual Funds, etc. can provide higher returns if you take more risk. But these risks are not always and in entirety, good for the financial health. One serious possibility is the investment going wrong, resulting in a massive loss for the investor.
Each of us has a risk tolerance level that guides our investment decisions. And in order to create a balanced and healthy mix in the portfolio, risky and risk-free investments need to co-exist.
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