5 Reasons to Invest in Fixed Deposits

5 Reasons to Invest in Fixed Deposits

Why do people invest in fixed deposits or FDs, and why should people invest in a fixed deposit account? 

Remember, fixed deposit investment offers several distinct advantages. Let us outline a few benefits of investing in FDs from a return and risk perspective. Without a doubt, the fixed deposit is one of the safest and surest investment instruments. However, while the FDs provided by banks offer guaranteed returns with virtual safety of principal, the FDs offered by NBFCs have the advantage of higher FD interest rates. Moreover, be it the FDs issued by banks or by the NBFCs, it is possible to buy the FD online with just a few clicks in your internet banking account.

Apart from high FD interest rates and flexibility, these fixed deposit accounts also offer the added advantage of liquidity. You can encash the FD at a small price but also take a loan against the FD, which is a better option in an emergency. We look at some compelling reasons investors should seriously consider Fixed deposit investment.

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Fixed Deposits offer near-guaranteed returns.

Unlike equities, bonds, and mutual funds, FD accounts are not influenced by market dynamics. Therefore, your returns are guaranteed and predictable on fixed deposits, irrespective of whether the Sensex goes up or down. Therefore, these fixed deposits are considered a safe and secure investment option.

There is no guarantee in non-bank FDs, so that's why you should stick to bank FDs. Otherwise, it can be risky. Even in the case of bank FDs, the guarantee is given by the Deposit Insurance and Credit Guarantee Corporation (DICGC). However, the government never allows banks to fail, so the FDs of banks are as good as assured.

You can earn handsome returns on FD.

Investments in equities and mutual funds are still subject to market risk. They can technically give positive returns or negative returns. However, the assumption is that the returns on equity and equity funds would be positive and attractive over the long term. While the other asset classes carry this risk of uncertain returns, the fixed deposits not only pay you attractive returns but also give returns that are virtually assured.

With the rising interest rates in the market, most bank FDs have raised their rates. SBI offers over 6% return on a longer-term FD, while NBFCs like Bajaj Finance offer rates of returns that are at least 200 basis points spread above what the banks offer. The FD interest rate is invariable better than savings accounts. More importantly, the FD interest rate for senior citizens is also higher compared to other investors. For instance, in the case of SBI FDs, the senior citizens earn 50 bps extra on a 1-year deposit and 80 bps extra on a 5-year deposit. That is undoubtedly an added kicker for senior citizens.

Fixed deposits are easy to invest in and easier to monitor

The FD may look like a staid banking product, but the fixed deposit product is also very flexible. The FD is both; easy to invest in and also easy to monitor. Let us look at the ease of investing first. Investing in a fixed deposit without any hassles at all is possible. All you need to do is complete and submit an application form along with the payment. It can still be simpler if you are comfortable with internet banking. You can open an FD account online from the comfort of your home and even transfer funds from your savings account to your FD account online. If you want to do the equivalent of something like the SIP in mutual funds with FDs, you can opt for the recurring deposit scheme.

How are FDs easy to monitor? Firstly, if you are already invested in FDs, there is not much tracking that you need to do. Unlike equities or mutual funds, where you need to track the stock prospects, the mutual fund portfolio, the Sharpe ratio, Treynor ratio, portfolio shifts etc. FD is a simple fixed return product without too many complications. Since the FD interest rate is constant throughout the tenure, you need not monitor its performance regularly. One thing you have to observe is the maturity date of the FD. However, avoiding monitoring is possible by opting for auto-renewal. With this facility, the bank will automatically renew the FD when it matures. Such instructions can also be modified.

Bank FDs can be pretty liquid too.

The general belief is that savings accounts are liquid, but FDs or fixed deposits are not very liquid. That is not true. For instance, FDs can be withdrawn as and when needed. Although you will be charged a penalty, you will always have a sum of money to fall back upon. This is very useful in the event of an emergency. Of course, it is never advisable to break the FD unless the situation is demanding and there is no other choice for you.

One more way to get liquidity out of your bank FD is via taking a loan against FD. The loan will be given up to 75% of the FD value and can be repaid at any time to release the FD. The interest on the FD continues, and only the net differential of around 2% has to be paid for the loan. The interest rate on this loan is meagre as they are back-to-back secured.

Fixed deposits also offer some additional advantages.

Apart from all the regular features in an investment, the fixed deposit also offers an additional advantage, with two essential features being the Nomination and Sweep-in facility. Let us first look at what nomination is all about. Opting for the nomination facility can provide the nomination when opening the FD account itself. The nominee becomes entitled to the rights of enjoying the FD on the demise of the original FD holder. Such nominations can also be changed; even a minor can be a nominee.

The sweep-in facility in an FD is quite interesting. In the modern world of internet banking, NEFT payments and NACH payments, you often may end up in a situation where you don’t have sufficient funds to honour a cheque that has come up for payment. Here the sweep-in facility of an FD can help out. The funds would automatically be drawn from the FD to honour the cheque, which can later be replenished.

FDs are certainly an investment idea to reckon with and a product that offers the investor many benefits.