Short-Term vs Long-Term Fixed Deposits: Making the Right Choice for Your Financial Goals

In the last few years, there has been a spike in the number of investors investing in Fixed Deposits (FDs). This is primarily because of the rise in FD interest rates and the benefit of parking money in a safe and secure investment vehicle that's unaffected by market volatility. However, before investing in an FD, it's important to consider your financial goals so that you can make an informed investment decision. 

For example, if you are planning to buy a new car in the next 12 months, investing in short-term FD could be more apt. In this blog, we have explored the difference between short-term and long-term FDs and which one could be a better investment option for you.

Understanding Short-Term Fixed Deposits 

Short-term FDs are designed for shorter durations, typically ranging from 7 days to 1 year. These FDs offer higher interest rates compared to traditional Savings Accounts, making them an attractive option for individuals who have excess funds that they don't need immediately but anticipate expenditures in the near future.

However, if you're looking for high-interest Savings Accounts, consider Ujjivan Small Finance Bank. Additionally, you'll get to enjoy a feature-rich Debit Card, exceptional customer service and the convenience of Digital Banking.

Anyway, let's move to short-term FDs. For example, let's say you have ₹1 lakh that you don't require for a few months but plan to use it for a down payment on a car. In this case, parking your money in a short-term FD could be a wise decision. 

Exploring Long-Term Fixed Deposits 

On the other hand, long-term FDs have a longer tenure, ranging from 1 year to a maximum of 10 years. These FDs offer higher returns than both short-term FDs and savings accounts, making them an ideal choice for individuals with long-term financial goals. 

For instance, if you're saving for your child's higher education or planning for retirement, a long-term FD spanning 5 or 10 years can help you accumulate wealth over time while providing stability and security. Unlike equity-related instruments that carry more risk, long-term FDs offer a safer option for wealth accumulation. 

Now, let's dive deeper into the differences between short-term vs. long-term fixed deposits:

1. Tenure: Short-term FDs: 7 days to 1 year; Long-term FDs: 1 to 10 years. 

2. Interest Rates: Short-term FDs offer higher rates than Savings Accounts. However, the overall returns could be lower than long-term Fixed Deposits.

3. Taxation: Interest earned on both FDs are applicable for TDS (Tax Deducted at Source) on interest above ₹40,000 (₹50,000 for senior citizens). Avoid TDS with Form 15G/H if your income is below the minimum taxable limit.

4. Safety: Investments up to ₹5 lakh (for both FDs) is insured under DICGC (Deposit Insurance and Credit Guarantee Corporation).

5. Liquidity: Short-term FDs offer better liquidity than long-term FDs. However, premature withdrawal may attract a certain penalty charge. Please note that this feature is only applicable for callable FDs. For non-callable FDs, early withdrawal is not allowed.

6. Purpose: Short-term FDs suit immediate goals like car purchases or vacations. Long-term FDs are ideal for goals like buying a house or retirement planning.

7. Opportunity Cost: Short-term FDs have lower opportunity costs as funds are reinvested sooner. Long-term FDs have higher opportunity costs due to extended investment period. 

8. Goal Alignment: Short-term FDs fit short-term needs; long-term FDs align with long-term financial goals. 
 

What Should You Consider - Long-Term or Short-Term FD?

As an investor, consider these factors before booking a long-term or short-term fixed deposit:
 

1. Financial Goals

If you have short-term goals like saving for vacation, or buying a gadget, short-term FDs could be more suitable. If you have a long investment horizon and seeking higher returns, booking a long-term FD could me more apt.

2. Returns on Investment

The compounding effect really impacts your investment if you stay invested for the long-term. This is where long-term FDs excel. You end up earning more when your FD matures. However, banks like Ujjivan offer high-interest short-term FDs. So, if you have short-term goals, you can open a short-term FD with high interest rates. Ensure to choose the right tenure to maximise returns.

3. Liquidity Needs

Evaluate your liquidity needs. Do you need cash in hand? If so, booking a short-term FD could be apt. However, to truly recognise the potential of Fixed Deposits, it's essential to stay invested for the long-term. Consider these factors before investing in long or short-term FDs.

So, Which One to Choose?

To build a healthy investment portfolio, you may need to strike a balance between long-term and short-term FDs. It would also help you diversify your portfolio. For example, you can have some amount invested in short-term FDs for liquidity needs. 
 

Additionally, keep monitoring interest rate trends so that you can make the most of your investments. For example, if you have invested in a short-term FD (tenure 6 months). A high-interest FD with Ujjivan catches your eye.  In such situation, after FD maturity, you can reallocate/reinvest the funds in the high-yield FD.