6 mins read . 11 Nov 2022
Fixed deposit or FD is a product that offers a fixed rate of return. That is called the interest rates on fixed deposit. The reason most investors consider a fixed deposit investment is that it gives stability of returns and also diversifies the risk of being too focused on a portfolio of equities. It also helps reduce the overall risk quotient.
One way to select the best FD in the market is by using the FD interest calculator. A fixed deposit account can be opened with any bank and the rates are fairly attractive now at around 6.5% considering the hawkishness that the RBI has shown in recent times. The FD is not just safe and an assured return investment, but it also is simple in that you can invest in a FD online without having to go to the branch of your bank.
Let us now turn to why an investor must include the FD in the portfolio? There are several benefits of including FDs in the portfolio. Remember, when we talk about FDs, there are bank FDs, NBFC FDs, FDs by institutions and corporate FDs. For this discussion, we will not focus too much on corporate FDs, since they carry an element of default risk, unless it is from a very blue chip company. Now for the reasons to include FD in your portfolio.
a) A fixed deposit (FD) is an extremely flexible form of an investment. You get a variety of choices to select from including in terms of the tenure, investment amount and withdrawals. Even the interest payment can be annual, quarterly, monthly or even lumpsum at the end of the tenure in a cumulative format. Unlike what many people believe, FDs can also be liquid since these FDs can be encashed at a small cost. Better still, one can also avail a loan from such FDs, which adds to its flexibility as an investment option. One can choose a cumulative FD where the interest also becomes the principal for the next tranche, in which case you are also free of reinvestment risk.
b) Bank FDs in particular are very low on the risk scale. You can say that they carry minimal or zero fixed deposit risk and it is one of the biggest benefits of a fixed deposit. Risk-averse investors and beginners can also choose an FD to receive guaranteed returns with very little or minimal risk involved. FDs are also covered under the DICGC deposit guarantee wherein your deposits are guaranteed up to Rs5 lakhs. However, even otherwise, the government has never allowed banks in India to fail, considering their systemic importance to the economy and the element of trust that they carry.
c) In a world of uncertainty, you do need some amount of guaranteed returns or assured returns. That is what FDs provide. Equities, at times, not only give zero returns but even result in capital depletion, especially if you by speculative stocks. That risk does not exist in bank FDs. The return is fixed through the tenure of the investment so there is not much you need to worry about. Your returns are assured irrespective of how rates move or how the Nifty and Sensex move.
d) This was stated earlier but this is an important point. FDs can also be liquid. You don’t have to just break the FD. Instead, you can also take a loan against the FD and normally the bank would give you a loan up to 85% to 90% of the FD value since it is an assured return bank FD. Most banks offer loan against the FD where you get the loan online and you only pay the incremental interest.
e) There are tax benefits also in FDs. They are more suited to senior citizens due to high TDS limits. Also, long term FDs of over 5 years give Section 80C benefits. Otherwise, FDs are taxed like any other income at your peak rate of tax.