Fixed deposits: Sensible investment options or not?

Bank FDs have been the go-to investment option for millions of Indians through the years. But is an FD really a good investment?

The primary goal of any investment is to augment one’s wealth. We are taught by our parents and elders to save money regularly, but merely saving money does not guarantee wealth creation. Instead, it is better to look at safe and reliable investment options.

One such option is a bank fixed deposit (FD). These have been a popular investment instrument for scores of Indians through the years. We may have heard of the term ‘FD’ even as children – because most parents made fixed deposits to increase the size of their savings! They are sensible investment options offering a guaranteed and quantifiable return on the initial deposit.

But are fixed deposits the best investment option? Let us examine the pros and cons of investing in FDs.

The pros…

• FDs are highly liquid. Though there is a minimum lock-in period of six months (as stipulated by most banks), it is possible to withdraw the FD at short notice if one is short of funds.
• Some banks allow customers to take short-term loans against their FDs.
• The returns on fixed deposits are predictable and quantifiable. This is because they earn money using a constant rate of interest throughout the deposit’s tenure. The growth of the deposit is not influenced by market fluctuations. Hence, you can calculate how much money you will receive on the deposit’s maturity right at the start of the FD.
• You can receive the interest on the FD as a lump sum or at periodic intervals – the latter option gives you a second income stream.
• It is possible to time the deposit’s tenure basis your future needs; for example, you can take an FD for five years so that the maturity date coincides with your child’s entry into senior college.

The cons…

• The income from the FD is fully taxable, hence the returns you actually get is a sum of money after deducting the taxes accrued on it. The remainder may not constitute an appreciable increase in initial investment.
• The returns on the FD normally do not succeed inflation, especially if the fixed deposit is taken over a longer period of time. This is because the rate of interest does not rise or fall as per market fluctuations.
• The bank may reduce your rate of interest on premature withdrawal of the FD.

 

Before investing your surplus funds in a fixed deposit, it is better to take the inputs of an experienced financial planner who can work out the merits of the proposition for you. Alternatively, you opt for other investment options such as tax free bonds, PPF or short term funds – all of these offer better returns over a period of time.