7 Benefits of Investing in Fixed Deposits

In Indian households, Fixed Deposits (FDs) are considered the most preferred investment choice. FDs provide secured and guaranteed returns. Additionally, FDs are not market-linked products, meaning the applicable interest rate is unaffected by market downturn. 

But, is it only fixed interest that makes FDs attractive among investors? Let's dive in to understand the many benefits of investing in Fixed Deposits.

7 Top Benefits of Investing in Fixed Deposits 

1. Higher Interest Rates

Fixed Deposits offer higher interest rates compared to Savings Accounts. This helps investors maximise their savings at low risk. FD interest rates are calculated via the compound interest method, allowing depositors to earn higher returns upon FD maturity. We shall discuss the effects of compounding later in this article, so keep reading!

2. Flexible Deposit Tenure 

Fixed Deposits offer a wide range of investment periods, from as short as 7 days to as long as 10 years. You can opt for short-term FDs if you have short-term goals like buying a car or vacationing. However, staying invested for the long-term can help you fetch higher returns at the time of FD maturity - again, thanks to the power of compounding.

Anyway, this flexibility in tenure selection allows investors to select terms that best align with their financial goals and needs, ensuring optimal returns and liquidity based on their individual circumstances. 

3. Minimal-Risk Investments 

Fixed Deposits carry minimum risk. They are not market-linked products like mutual funds. The interest remains fixed throughout the deposit tenure completely unaffected by market volatility. Additionally, FD investments up to ₹5 lakh are secured under Deposit Insurance and Credit Guarantee Corporation (DICGC) per depositor per bank.

4. Convenient Access to Funds 

FDs offer better liquidity options compared to ELSS (Equity-Linked Saving Schemes), PPF (Public Provident Fund) and a few other small saving schemes. You can withdraw your deposit amount from FD in case of any emergency. However, premature withdrawal of FD may incur penalty charges. Please note that the premature withdrawal facility is available only for callable FDs. 

For non-callable FDs, you cannot withdraw the amount before the maturity period. That said, there could be certain specific situations where the bank may allow you to withdraw funds. Check with your bank to understand better. To know more about premature withdrawal rules and regulations, read this blog.

5. Book FD from Anywhere

Beat the queue and say goodbye to long and boring paperwork. Thanks to Digital Fixed Deposits, you can now book an FD from anywhere, anytime. The entire process is 100% paperless and helps you save a lot of time and effort.

6. Tax Benefits 

Though the interest earned on FD is taxable as per the Income Tax Act, 1961, you can save on your tax outgo. Tax-Saving Fixed Deposits offer tax deductions of up to ₹1.5 lakh under Section 80C of the Income Tax Act. However, kindly note that Tax-Saving FDs come with a mandatory 5-year lock-in period, during which early withdrawals are not permitted.

7. Loan or Overdraft Against FD

Need extra cash to meet immediate expenses? Instead of taking high-interest personal loan, you can take a loan or overdraft facility against your Fixed Deposit. The interest rate for overdraft is quite lower than personal loans. Also, you don't have to repay the loan EMIs. The tenure is the same as your FD tenure. 

You don't have to repay the loan in EMIs. All you need is to make sure the amount is repaid before your FD maturity date. Any unpaid amount will be adjusted with your FD proceedings at the time of maturity.

Bonus Advantage: The Power of Compounding

The main advantage of FD is the interest is calculated based on compound interest calculation method. FDs usually compound on a quarterly basis. This means, at the end of every quarter, the deposit is reinvested along with the interest accrued in the previous quarter. In the next quarter, the total interest would be calculated on not only the principal but also on the accrued interest. 

To put in simple words, you earn interest on interest, resulting in higher overall returns at the time of maturity. 

Point to note: FDs also offer options to receive periodic interest pay-outs (monthly, quarterly or annually) or interest pay-out at the time of maturity. You can choose the frequency based on your financial goals. 

How to Maximise Returns on Fixed Deposits?
 

Here are a few tips you can follow to maximise returns on your FD:
 

1. High-Interest Fixed Deposits

Generally, Small Finance Banks like Ujjivan offer high-interest FDs. However, the rates may vary depending on the tenure. So, if your intention is to open an FD to earn quick returns, go for short-term FDs. However, staying invested for the long-term can help you book higher returns, thanks to the power of compounding. Book an FD keeping these factors in mind. Remember, your investments should be aligned to your financial goals.

2. Opt for Cumulative Fixed Deposits

Cumulative FDs offer interest pay-outs at the time of maturity. This helps investors enjoy long-term growth due to the compounding effect. However, if you're looking for a regular income stream, you may opt for non-cumulative FDs, where interest pay-outs happen periodically.

3. Diversify Your Investments 

Diversify your FD investments across different tenures. This may help you earn better returns while offering liquidity. This strategic FD investment method is called FD laddering.