Fixed or time deposits are one of the most popular and oldest investment options. Compared to a regular savings or current bank account, the rate of interest on such deposits is higher.
Time deposits are recommended to mitigate the overall investment risk of your portfolio and counter the high-risk investment options like equities and mutual funds. Additionally, such deposits may be used to increase your income through regular interest payouts, which ensures you do not have any financial difficulties.
Here are five reasons why you must choose to invest in fixed deposits (FDs):
1. Assured and better returns
When you invest in stocks or equity-related mutual funds, the returns are linked to the overall performance of the markets. On the other hand, time deposits provide assured returns because the fixed deposit interest rates are pre-determined. FDs are risk-free investments. When you invest in FDs, you do not have to worry about market fluctuations. You need not focus on timing the markets. This allows you to concentrate on your job or business while earning good returns on your investments.
Compared to other fixed-income securities such as government bonds or treasury bills, the rate of interest offered by institutions on the FDs is higher. Additionally, the fixed deposit rates are higher compared to other types of bank accounts. Therefore, you have the opportunity to earn better returns with no risk.
Financial institutions offer different investment tenures when you choose to invest in FDs. You may choose as less as seven days to as long as ten years based on your preferred investment horizon. The FD rates vary for different durations, which make these very versatile.
3. Loan availability
Most lenders allow you to borrow funds against your FD holdings. Additionally, you may procure an overdraft facility against these investments.
Generally, a fixed deposit comes with a pre-determined maturity date. However, financial institutions allow you to liquidate your holdings before the due date albeit at a penalty. Therefore, contrary to common perception, FDs are liquid investments.
5. Tax savings
When you invest in five-year time deposits, your investment is eligible for tax benefits under section 80C of the Income Tax Act. Therefore, you can reduce your tax liability through such investments.
Often, some people argue that you are able to earn higher returns in products like mutual funds, derivatives, or shares. However, these are high-risk investments with the possibility of losing your entire capital. It is recommended that if you do not have a high-risk tolerance, investing surplus funds in FDs is a better option.