The Reserve Bank of India (RBI) has increased the repo rates four times since May 2022. It is expected to further hike the policy rates before taking a pause. Against the backdrop, fixed deposit (FD) rates have gone up, and in the last few months, lenders have started offering better FD rates for investors.
FD investments remain the favourite investment practice for people for their capital protection, income certainty, low risk and high flexibility. The scheme is well-suited for many purposes, from investors seeking to park short-term funds to building a post-retirement corpus. Listed below are the key benefits of investing in an FD.
- Guaranteed Return on Investment – The biggest advantage of FDs is stability. Fixed deposit interest rates remain the same throughout the tenure of the investment, irrespective of economic downturns, market fluctuations or policy rate changes. For example, suppose an individual enters a 3-year FD scheme at 7.5% p.a. In that case, even if the bank changes its FD rate card to 7% during the deposit tenure, the individual still receives interest at 7.5% p.a.
Investors can calculate FD interest to understand the exact returns on investment and plan their expenses accordingly. Therefore, FD schemes are highly suitable for risk-averse investors or individuals willing to invest in low-risk schemes. An FD offers a higher return than traditional saving schemes. Additionally, the avenue is highly beneficial for senior citizens eligible for a higher interest rate on an FD investment.
- Flexible Tenure – Investors can choose a specific tenure for their investment depending on their requirements. Once the FD matures, they can withdraw or reinvest the funds. The mode of investment is therefore suited for investors with varying time horizons.
- Capital Protection – The Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the RBI, provides insurance to fixed deposits offered by scheduled banks. The insurance coverage is applicable on cumulative bank deposits that include fixed, current, recurring, and savings accounts for a value of Rs. 5 Lakh per bank per depositor in case of bank failure. Therefore, even if the bank defaults, the invested amount remains insured.
- Tax Deduction – Many banks offer tax-saving fixed deposit schemes. The schemes comprise a 5-year lock-in period and the principal amount worth up to Rs. 1.5 Lakh can be claimed under tax deduction under section 80C of the income tax act. The interest component, however, is taxed according to the investor’s tax slab. Therefore, FDs serve as an excellent avenue for investors seeking to draw tax benefits.
- Loan against Fixed Deposit – Investors can apply for loans using their FDs. Such loans are typically granted as an overdraft facility. The credit limit is based on the fixed deposit amount, and interest is set on the amount drawn until repayment. A significant advantage of availing a loan against an FD is that the investor continues to draw interest on the investment throughout the loan tenure. Investors also can make withdrawals anytime up to the credit limit from their overdraft account and repay it according to their repaying capacity. Investors seeking to cater to short-term illiquidity can apply for a loan against fixed deposits rather than liquidating their FDs.
- Credit Card against Fixed Deposit – Individuals who do not have a credit score or have a low credit score can apply for credit cards against their fixed deposit investments and enhance their credit scores.
- Easy to Liquidate – FDs can be liquidated quickly depending upon investors’ requirements. Investors facing short-term illiquidity or emergency funds can liquidate their FDs in simple steps and instantly gain access to their savings.
- Multiple Fixed Deposit Accounts – An investor can have multiple FD accounts. Investors seeking to make more substantial investments can increase the number of FD accounts based on their requirements.
Conclusion
FDs are a safe investment option for investors seeking to avoid market volatility. Unlike stocks and mutual funds, where funds are at risk, the investments made in an FD are safe and free from any external events. Investors can calculate FD interest rate comparisons across banks to understand the best option to grow their savings.
