5 Features & Benefits of Fixed Deposits for Your Investment Portfolio
Fixed deposits are one such asset class that’s gained popularity for carrying no risk and steady returns. Read on to know about the benefits of FDs, their features, and more.
What are fixed deposits?
A fixed deposit receipt is an instrument issued by banks and financial institutions that promises to pay interest on deposits made for a certain period.
When you open a fixed deposit (FD), your money is locked in for a specified period. At the end of the term, i.e. after the maturity period, the bank pays you back your principal amount plus a certain interest, which is your return.
Fixed deposits offer several advantages over time. Read further to understand its features and benefits.
Features of fixed deposits
While experts recommend having a decent quantum of FDs in an investment portfolio, you must look at their features to understand them better. Here are some of the most common features of an FD.
1. Secure investment instruments
The most important feature of a fixed deposit is that it is risk-free. Compared to other investment options that are significantly influenced by market conditions, fixed deposits are a safe investment option. FD returns are fixed and thus are a reliable investment option. At the end of the maturity period, you get guaranteed returns.
2. Interest rate
FDs offer a steady interest as a return on the principal investment. These interest rates are typically higher than that of a savings account. It is important to note that interest rates fluctuate and are affected by market conditions. Moreover, the principal amount deposited and tenure also directly impact the interest income.
The interest is paid periodically or fully on maturity, depending on your preference. You may also note that senior citizens are offered higher interest rates.
3. Age and investment limit
An individual over 18 years of age can open an FD. Minors may also open their accounts, but they must be managed by a guardian. Additionally, FDs require a minimum investment amount of Rs. 1,000, although there is no maximum limit. However, do note that higher deposits attract higher interest income.
FDs are a long-term investment option. The maturity period can range anywhere from 7 days to 10 years. The investor has the choice to choose the tenure. Upon maturity, the FD can be set for renewal.
An important feature to note about FDs is that they attract penalties on premature withdrawals. The penalty will depend on many factors like days since opening etc.; This feature makes FDs illiquid instruments.
Benefits of FDs
1. Guaranteed returns
FD returns are guaranteed unlike other investment options like equities and mutual funds, where market factors determine returns. This is one of the most important benefits FDs lend to its investors, making it an extremely attractive and popular investment avenue.
As they offer guaranteed returns, FDs carry minimal to no risk. This benefit can be used to hedge your portfolio against risk from other investment avenues. Even if you experience losses on your other investments, FD returns can help offset them. Thus, they can be an ideal addition to your portfolio.
FD interest income can be deduced when filing returns. Tax saving fixed deposits allow for a maximum of Rs. 1.5 lakh tax deduction under Section 80C of the Income Tax Act of 1961. So while you earn interest, you pay no taxes, making it a win-win situation.
3. Loan facility
You can draw up a loan against your FD investments. If you need funds, you can draw a loan against your FD, up to 90% of the invested amount.
A fixed deposit is a deposit you make with a bank or any financial institution that earns interest at a fixed rate and is locked in until maturity. The features and benefits of FDs make them a must-have in any investment portfolio. They also can help balance the risk factor in your portfolio. So consider all the pointers mentioned above before investing in FDs.
Q1. How to open an FD?
Ans. You can visit the bank of your preference to open an FD in a hassle-free manner. Alternatively, you can open an FD online by visiting the website of the bank you choose in just a few minutes.
Q2. What is the highest interest rate offered on FD in India?
Ans. The interest rate on FDs can go as high as 7% or even more. The interest rate is influenced by many factors like economic conditions, etc.
Q3. Are FDs better than stock investments?
Ans. All investment options have their own pros and cons. While equities offer great returns, the risk is extremely high. On the other hand, FDs may offer standard returns at minimal risk. Your choice and preference should be based on your risk tolerance.
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