FD Investment: An Informative Guide on The Benefits and Risks

From guaranteed returns and considerable low risks, to high flexibility and tax benefits, fixed deposits (FDs) offer a plethora of benefits. This makes them an attractive option for investors of all age brackets and risk appetites. 

If you are planning to start an FD investment, being aware of the benefits and risks is essential to make an informed choice. Read on to know more.

Key Benefits of Fixed Deposit Investments

Fixed deposits are a highly sought-after investment choice because of the advantages they offer. Check out some of them below:

• Assured Returns

The interest rates are fixed once you invest in an FD. They are not affected by market fluctuations, so your returns are stable and assured too. 

You can use a online fd calculator and compute the returns from the deposit beforehand. This will help you choose terms that give the maximum returns. Since the calculator also provides estimates for payouts, you can easily ensure that you get the returns you need. 

• Safety of Initial Deposit

Another great benefit of FDs is that the amount you initially invested and the interest you earn remains completely secure. This is one of the key reasons why it is an excellent option for a conservative investor who prioritises safety over returns. 

• Tax Benefits

By booking tax-saving fixed deposits, you can claim tax deductions u/s 80C of the Income Tax Act of 1961. Under this section, you can claim a maximum deduction of up to ₹1.5 Lakhs in a year. 

The deduction ultimately helps lower your taxable income, thereby lowering your tax liabilities. Given this, it can be an excellent option for long-term savings.

• Loan Facilities

You can also use your fixed deposit investment as collateral and get a loan. The best part is that you do not need to break the deposit, and you continue earning interest on your FD. 

Additionally, the interest is marginally higher than the interest you earn but lower than the interest levied on other types of loans. So, you don’t just get easy but also affordable access to funds.

• High Liquidity

Another significant benefit is that most issuers let you withdraw funds before the maturity period. This can be helpful if you need immediate funds. However, you may need to pay a premature withdrawal charge for this facility.

• Power of Compounding

If you invest without withdrawing, you can better earn returns, due to the power of compounding. Here, the interest is added to your principal investment for the calculation of the next interest. 

• Flexible Tenor Options

Financial institutions let you choose the investment tenor for your FD investment, which can range up to 10 years. This flexibility helps you tailor the investment for specific financial goals and get the corpus at the right time.

• Higher Rates for Senior Citizens

Most financial institutions offer a higher interest rate than regular citizens if your age is 60 years or above. This allows you to earn more returns, which you can use to manage your expenses during retirement.

Risks Associated with Fixed Deposit Investments

Like every investment option, FDs also come with some risks. Here are some drawbacks that you need to be aware of before opening an FD:

• Interest Rate Risk

Usually, the interest rate on an FD remains the same throughout the investment term. It is beneficial since you get stable returns throughout the tenor. However, in case the market interest rates for FDs increase during your term, you will not be able to benefit from these better rates. 

• Default Risk

While it is rare, the financial institutions holding your FD may not be able to return your deposits or provide returns due to various reasons. To mitigate this risk, ensure you check the credibility and the overall financial health of the issuer. 

Thankfully, in India, the Deposit Insurance and Credit Guarantee Corporation (DICGC) insures your deposits. This means that if the bank defaults, your funds will remain protected. However, note that the maximum insurance is ₹5 Lakhs per deposit per bank.

• Liquidity Risk

You invest in a fixed deposit for a specific tenor. In case you need funds urgently, most issuers allow you to make premature withdrawals from your deposit. 

However, you need to pay the premature withdrawal charge. It is generally a percentage of the funds you choose to withdraw. This can take away from your returns. Also, remember some FDs do not offer this facility, which can make managing urgent needs challenging. 

• Inflation Risk

Rising inflation reduces the value of money you have kept in your FD. This is because while FDs provide stable interest rates, they do not change with inflation. So, if the interest rate on your FD is lower than the inflation rate, the overall value of your money will not increase. 

• Reinvestment Risk

In case you choose to reinvest your FD, your returns will be lower if the interest rates are falling. This is because you will have to reinvest the returns at the prevailing interest rates that are lower. With this information in hand, you can decide whether adding a fixed deposit investment to your portfolio is ideal. By knowing the benefits of FDs, you can make the best use of the investment to reach your financial goals. Remember the risks and employ the right strategies to mitigate them.