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Are Fixed Deposits Good Or Bad Investments?

Should invest in Fixed Deposits or are there better investments? See which investment options are better than FDs and why?
November 24, 2020

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There are three things you are guaranteed in India: Good street food, colourful festivals and the fact that your parents will invest in Fixed Deposits. This traditional form of investment is usually part of every other Indian investor’s portfolio because of the fixed returns and safety.

But historical data suggests that Indian investors are moving away from FDs. In 2017-18, the percentage of FDs fell from 58.6% to 57.7%. If you go back to 2008, the numbers suggest that FDs have seen a sharp decline from 63.5% to 58.6%.

So if you’re a new investor wondering whether you should invest in FDs, this blog is for you. Let’s start off by understanding how fixed deposits work.

What Is A Fixed Deposit?

An FD is a conservative investment option that several Banks, Post offices, and Non-banking Financial Companies (NBFCs) offer. You can choose a fixed tenure based on your investment goals. The deposit earns an interest once this duration is completed. The interest is earned over the entire duration of the investment.  

The interest rate is locked-in at the start of a fixed deposit and remains unchanged throughout tenure regardless of market fluctuations. But one big catch - there is a penalty for early withdrawal. You cannot withdraw investment before the end of the maturity period. This penalty varies from bank to bank but is applicable across all. 

Types Of FDs

1. Normal Fixed Deposits

  • Simple bank fixed deposits.
  • Have a fixed tenure that ranges from 7 days to 10 years. 
  • One time lump sum investment. 

2. Corporate Fixed Deposits

  • Offered by Financial and NBFCs.
  • Fixed tenure ranges from months to years.
  • Comparatively higher returns Vs normal FDs.

3. Flexi Fixed Deposits

  • Combination of Demand Deposit and Fixed Deposit.
  • Offers liquidity of savings a/c and reasonable high returns of an FD.
  • Has the Auto-sweep feature that transfers the excess balance to the FD.
  • Excess balance amount is decided by the investor.
  • Balance deposited for a default term of 1 year.

4. Senior Citizen Fixed Deposits

  • For investors over the age of 60.
  • Higher interest rates compared to normal FDs.
  • Flexible tenure.

5. Tax-saving Fixed Deposits

  • Tax exemption on the principal amount.
  • Minimum deposit is ₹1.5 lakhs.
  • Fixed lock-in period of 5 years.

6. Cumulative Fixed Deposits

  • Interest compounded quarterly, half-yearly, or yearly.
  • Interest earned is paid after maturity. 

7. Non-cumulative Fixed Deposits

  • Earned interest paid out monthly, quarterly, half-yearly, or annually.
  • Regular payments.

8. NRO Fixed Deposits

  • For Non-resident Indians.
  • NRIs can deposit the money earned in India in the NRO FD account. 
  • Interest can be transferred to the country of residence.
  • Principal amount can be transferred back to a certain limit. 

9. NRE Fixed Deposits

  • For NRIs. 
  • NRIs can invest money earned abroad in the NRE fixed deposit account.
  • Entirety of the interest and principal amount can be transferred back. 

5 Things To Know Before Investing In An FD

1. Safety: An FD is a relatively safe investment option. Market fluctuations do not impact the locked-in interest rate. However, Liquid funds can provide similar if not better, level of safety and returns.  

2. Fixed lock-in period: The money invested cannot be withdrawn before the end of the tenure and there are penalties for early withdrawal. In contrast, Mutual funds offer higher liquidity and do not levy early withdrawal charges.

3. Reasonable interest rates: FDs offer conservative interest rates in line with the low-risk profile. FDs offer lower interest rates (5-6.5%) as compared to liquid funds (7-9%).

4. Taxes: FDs offer tax benefits under section 80c on investments up to ₹1.5 lakhs. ELSS funds have a low lock-in period and offer better interest rates and tax benefits. 

5. Benefits senior citizens: Investors above the age of 60 can get a better interest rate with Senior Citizen FDs compared to regular FDs.

What Are The Risks Of Investing In Fixed Deposits?

1. Lock-in period: The principal amount cannot be withdrawn before maturity. This means that money once invested is stuck for the duration of the deposit. There is a penalty for early withdrawal too. In the event of an emergency, this liquidity risk can be detrimental. 

2. Bank defaults: A bank defaulting is rare but definitely possible. But ₹5 lakhs per person per bank is guaranteed by the Deposit Insurance and Credit Guarantee Corporation (DICGC). This includes the principal and interest. Any amount over ₹5 lakh is subject to risk.

3. Low interest rates: The locked-in interest rate never changes. This is both a cause for concern and a safety net. Market fluctuations don't impact the locked-in interest rate but neither is your money earning more interest depending on the growth cycle of the economy. 


Is Investing In A Fixed Deposit A Good Decision?

FDs find their way into the portfolio of conservative investors due to the safety net that they offer. But at the same time, the less than stellar interest rates mean that the investment is not growing your wealth by an impressive margin. If what you are looking for is wealth creation, then there are better investment options than FDs. Read on to know more. 

List Of Better Alternatives To FDs

FDs are low-risk, low-reward investments perfect for senior citizens to investors looking for a safe investment option. But here is a list of investment options better than FDs based on returns, liquidity, and lock-in period:

1. Liquid funds (7-9%)

2. Debt funds (8-10%)

3. Equity funds (11-16%)

4. ELSS funds (11-16%)

5. Large cap stocks (12-16%)

6. Alternative investments 

Read this blog for a detailed take on investment options better than FDs 

Should You Invest In Mutual Funds Instead Of Fixed Deposits?

In terms of historical returns, indexation benefits, professional management,  and liquidity, mutual funds may be considered to be a better investment option than FDs. But whether or not you should invest in mutual funds depends on your age, investment goals, risk appetite, and other factors. 

Speaking to a Cube wealth coach can give you a clear idea about the investment options that can suit your goals and profile. What’s more? Cube's mutual fund advisory partner, Wealth First, curates a list of the best mutual fund investment options for Cube users. WF has 25+ years of experience in wealth advisory and a historical track record of beating the market by an average of ~50%. 

To know if you should invest in the best mutual funds, speak to a Cube Wealth Coach or download the Cube Wealth app today.

Wondering what are alternative investments? Watch this video to learn more.

Shriram Shekhar
Shriram is a Consultant at CubeWealth. He has developed cutting edge IT products for over 2 years before turning to his passion for the written word. His love for philosophy, developing products, and empowering people through quality content is what got him to CubeWealth.

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