Is fixed deposit a great investment option

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There has been a lot of debate about how debt funds offer a better alternative compared to fixed deposits. While that is absolutely justified, one thing you cannot forget is that these fixed deposits offer two very important attributes of stability and guaranteed returns; both of which do not exist in debt funds. Have you ever wondered why do people prefer fixed deposit investments? That is because fixed deposit investment offers a number of distinct advantages. Of course, you do know that opening an FD online is just a breeze these days, but that is just one of the many advantages of FD investments.

To begin with, fixed deposits offer one of the safest and surest investment instruments you can think of. While the FDs issued by the banks offer guaranteed returns with safety of principal, FDs offered by NBFCs and corporates pay higher rates of interest, but they are not as secure. When you buy the FD online next time, remember that this FD investment gives you the benefits of safety, security and liquidity in the form of loans against FDs.

Let us understand why the FD remains a great investment option despite the plethora of other choices that have come into the market. At times, old is really gold.

My Principal is safe and returns are assured

First and foremost, FD is not a market linked instrument, so you don’t worry about the vagaries of the market fluctuations. If you look at market linked investments like equities, bonds and mutual funds, they all carry market risks like price risk, interest rate risk etc. However, fixed deposit investments are not influenced by market fluctuations. In a sense, even though the returns may be lower, these returns are guaranteed and predictable on fixed deposits. This is irrespective of whether the Sensex goes up sharply or goes down  and also whether the interest rates and bond yields in the market go up or go down. That is why fixed deposits are considered a safe and secure investment option. 

A more practical question; does the government guarantee bank FDs. Technically, there is no guarantee in non-bank FDs, but that is the reason  you should stick to non-bank FDs only of very reputed companies. Even in the case of bank FDs, there is not government guarantee (unlike sovereign gold bonds). However, bank FDs are secured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) and above all, the government has never allowed a scheduled commercial bank in India to fail, due to systemic risk factors.

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On risk adjusted basis, FD returns are attractive

FD returns are not subject to the fluctuations in the market, unlike equities, bonds or mutual funds. These asset classes carry risk of uncertain returns. However, the fixed deposits or FD investment not only pays you assured returns but also give returns that are fairly attractive if you look at it on a risk adjusted basis. 

Rates on FDs can vary. If you look at the benchmark FD rates put out by SBI, longer maturity FDs are paying above 6% returns and you can earn a lot more if you are a senior citizen. That is fairly attractive returns. If you want to take a slightly higher level of risk, then you can opt for the FDs of NBFCs like Bajaj Finance. The offer up to 200 basis points spread above what the banks offer. In case you want tax breaks under Section 80C of the Income Tax Act, you can just opt for a 5 year deposit and that is also taken care of. FDs can be attractive on returns; both on risk adjusted basis and also on tax adjusted basis.

FD is devoid of complexity, so all can understand

If you look at it, there is no complexity in the FD product. You park your money with a bank and get returns or interest on periodicity of your choice. With internet banking, buying and redeeming FDs is a lot easier as it can now be done online. All you need to do to invest in an FD is to fill up and submit an application form along with the payment cheque. If you are comfortable doing it online, then you can just use your internet banking facility to open a new FD. You can also do the equivalent of mutual fund SIPs in FDs by opting for the recurring deposit or RD scheme.

Monitoring is another area where FDs make life much simpler for you. Here is how it works. Unlike your investments in equities and mutual funds, you don’t need to track macros, company information, fund portfolios, fund betas etc. Just put your money in a FD and forget about it. After all, FD is a simple fixed return product. Since FD rate is constant throughout the tenure, you need not monitor its performance regularly. Perhaps, the only thing you need to keep a tab on is the maturity date of the FD. Thanks to the alert system, you can even avoid that by opting for auto renewal. That surely makes your life a lot simpler.

Surprisingly, the bank FDs can be liquid assets too

We often tend to believe that while savings accounts are liquid, the FDs or fixed deposits are not very liquid. That is an incorrect assumption. Firstly, FDs can be withdrawn at short notice, although there is a small penalty cost to it. That can also be overcome by opting for a loan against FD. This is very useful in the event of an emergency. Taking a loan on FD is online process and the bank will fund up to 85% to 90% of the value of the FD at any point of time. So you don’t even need to break the FD, just take a loan against the FD. There will be a small interest cost to it, but it is still worth the trouble in an emergency, when you need funds.

FDs offer a plethora of additional features

If you thought that the fixed deposit is just about safety and guaranteed returns, there is a lot more to it. There are some additional merits that the FDs bring to the table. Two such key features are the Nomination and Sweep-in facility. Let us first look at what nomination is all about. By opting for the nomination facility, the nominee becomes entitled to the rights of enjoying the FD, on the demise of the original FD holder. You can even nominate a minor for such benefits. Nomination makes the process of transmission much simpler.

The sweep-in facility in an FD is a fairly interesting facility. In the modern world of internet banking, with auto debits, NEFT payments and NACH payments, you could find yourself in an embarrassing situation wherein your account does not have sufficient funds to clear the cheque. That is not a good feeling. In such cases, the sweep-in facility of an FD can help out. The funds would automatically get drawn from the FD to honour the cheque, which can later be replenished into the FD account.

To sum it up, fixed deposits or FDs are not tremendous wealth creators. For that you still need to rely on equities and equity linked mutual funds. However, FDs offer some additional benefits like guaranteed returns, stability of returns, loan liquidity etc. That is smart enough.

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