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What are the Pros and Cons of Investing in a Fixed Deposit?

mahindra-finance-author

by Mahindra Finance

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June 29, 2023

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3 mins read

An ideal way to kickstart your investment portfolio is through a fixed deposit (FD). It is not only risk-free and easy to comprehend, but also helps you in growing your wealth. In an FD, your money is held for a specific tenure and you earn interest on it until the date of maturity. FD interest rates are higher than the rates that are offered in savings accounts, which is also a reason why FDs are very popular. The pros and cons of investing in an FD are discussed below.

Pros of investing in FDs

FDs are considered as an ideal way to start saving money for the future. Its benefits are discussed below.

1. Low risk

FDs are not associated with market movement; hence, there is low risk. FDs provide guaranteed returns and are a preferred choice for individuals who have a low-risk appetite.

2. Fixed tenure

An FD scheme has a minimum tenure of six months and a maximum duration of five years. This means your money will be safeguarded and you will earn returns on it.

3. Loan against an FD

If you are in an emergency and need funds, you can simply take a loan against the FD without breaking your FD prematurely.

4. Flexible interest rate payout options

In an FD, you can select the desired term. Moreover, you can decide when the interest amount is credited to your FD account. You can choose between monthly, yearly, and at-maturity interest rate payout options. The senior citizen fixed deposit interest rates offered are higher.

Cons of investing in FDs

FDs do have certain disadvantages, which also need to be considered. The cons of investing in an FD are discussed below.

1. Low rate of return

The returns in an FD are guaranteed but the FD rates are low as compared to other market-linked investments.

2. Penalty on pre-mature withdrawal

If you withdraw the FD before its maturity date, you will have to pay a penalty charge. You could also get a low interest on your FD if you break it before the date of maturity.

3. No complete tax exemption

The interest you earn on an FD will be a part of your taxable income. As per the Budget 2019, your interest earnings on FDs up to an amount of INR 40,000 will be exempted from tax. However, if you earn an interest income that is greater than INR 40,000 your income will be deducted by 10% Tax Deducted at Source (TDS). Hence, if you are looking for an investment option that provides complete tax exemption, then FDs are not the ideal alternative.

Many choose to invest in FDs over any other form of investment for the low risk and consistent return it generates. This is why it remains a favorite investment avenue for retired investors. The pros outweigh the cons when it comes to fixed deposits and if you are looking for a low-risk investment option, you must invest in an FD at the earliest.

Conclusion

Fixed deposits (FDs) have long been a popular investment choice, offering advantages like security and guaranteed returns. Their predictable nature provides investors with peace of mind, knowing their benefits grow steadily over a chosen tenure. Additionally, advantages of fixed deposits include easy accessibility through flexible interest pay outs and loan facilities against the deposit itself. However, disadvantages of FDs include penalties for premature withdrawals and limited returns compared to riskier investment options. Ultimately, deciding whether FDs align with your financial goals requires carefully weighing the benefits and disadvantages in the context of your unique circumstances.

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