Pros and Cons of investing in a Fixed Deposit

Pros and Cons of investing in a Fixed Deposit

Evaluating fixed deposits

Every product has its merits and demerits and the fixed deposit or FD is no exception. Here we shall look at some of the advantages of FD. One of the biggest advantages of opening a fixed deposit account is that you start your journey towards building a safe and stable asset class in your portfolio. That is one of the biggest and primary benefits of fixed deposit account.

However, there are more than just advantages of stability because FD also offer diversification as we shall see later. Also, with rising interest rates in India, the fixed deposit rates are also becoming more attractive than before. On the flipside, there are also some downside risks in fixed deposits. To get a more balanced view, we look at the pros and cons of fixed deposit investments.

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Let us now turn to some of the key merits and demerits of fixed deposit investment.

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Table of Content

  1. Evaluating fixed deposits
  2. Merits (Pros) of a fixed deposit investment  
  3. Demerits (Cons) of Fixed deposit investment  

Merits (Pros) of a fixed deposit investment  

Here are some of the major pros of fixed deposit as an investment.      
a) First and foremost, FDs offer assured returns. Today, the bank FD or NBFC FD is one of the few instruments that still offers assured returns and adds stability to your portfolio.

b) FDs help to diversify the risk in your portfolio. You cannot have a portfolio entirely of risky equities and real estate. You need assets that will be stable, reliable and offering steady and reliable income. FD fills that gap.

c) It is not like you are locked into an FD for ever. You can prematurely withdraw the FD. You can also take a loans against the FD for short term emergency financial needs. The rates of loan are competitive and your FD is intact.

d) FDs offer tax benefits in that if you opt for a 5-year long term FD, your investment can get exemption under Section 80C of the Income Tax Act. However, such limits are circumscribed by the overall limit of Rs1.50 lakhs.

e) The facility of loan against FD makes it a liquid instrument so that you can get up to 90% of the value of your FD at any time with minimal hassles. All this comes with high security and the backing of a blue chip institution like a RBI regulated bank or NBFC.

f) Today the advantages of FDs are not just about the product but also the process. For instance, you can walk into a branch or just book the FD online. Even renewals can be done online with the latest rates applicable to the renewed FD. There are added perks like premium returns for senior citizens, incentive on renewal of FDs etc.

g) People often complain that returns are low in post-tax terms. However, one must remember that the returns are assured and come with no fluctuation.      
In short, FDs offer stability, assured returns, reliability and a good dose of flexibility too.

Demerits (Cons) of Fixed deposit investment  

Here are some of the downside risks of investing in fixed deposits.      
a) FD is still looked at as a very conservative or an investment for retired people. The returns on FDs in post-tax terms are too low, although things are improving with rising rates in the market.

b) FDs can have lock-in restrictions and any premature withdrawal has a cost. That eventually reduces the already low returns that you earn on FDs. However, there is a way out through the loan against FD route.

c) One major risk is that FDs don’t create long term wealth. That is true as equities do it better over the long term. However, FDs are more about stability and reliability.      
In the final analysis, it does work both ways for FDs. However, the bottom line is that every portfolio needs some stability and predictability. That is where these FDs fit in perfectly into your larger portfolio plan.