How is Fixed Deposit gaining popularity among households?

"Do not save what is left after spending, but spend what is left after saving." – Warren Buffet.

It is extremely important to save a portion of your salary, not only to accumulate a reserve for financial crises but also to prepare for retirement So, when you look for investment plans, and you get a variety of investment plans, then you decide which investment plan is right for you. 

According to SEBI's Survey, the Maximum number of people in India deposit their money in banks, insurance plans are 2nd most purchased plans, while less than 10 per cent opt for investing in mutual funds or stocks. 

Why is the fixed deposit preferable? 

Why don't people prefer to invest in stocks and mutual funds when they can make more money?

In order to understand this, you need to understand Fixed Deposit and its benefit:

Fixed Deposit

A fixed deposit is a type of deposit in which a fixed amount of money is deposited for a particular time period. Fixed deposit is offered by banks and non-banking financing companies. The tenure of the fixed deposit is determined by the person who deposits his funds. This period may vary from a couple of days to several years. Fixed deposits pay the depositor a fixed rate of interest in exchange for locking in those funds. It's pretty easy to open a fixed deposit account, and it can be done from online and offline channels. 

Now, we need to look at the advantages of Fixed Deposit to understand whether investing in a fixed deposit is the right choice.

Advantages of Fixed Deposit:

Risk-free investment:

What makes FD a safer choice than other investment options?

Investing in stocks and mutual funds can give you higher returns, but it also depends on how the market performs. On the other side, a Fixed Deposit account is designed to hold your money secure in all situations. It lowers the risk and helps you in protecting your finances in situations like inflation.

Assured rate of return:

The guaranteed rate of return is the main reason why individuals favour saving their funds in a fixed deposit. You will be confident of obtaining the claimed rate of return if you invest your funds in a fixed deposit account. Banks publish the fixed interest deposit rate on their website and in bank branches, making it easy for the customer to decide how much return he will get.

Banks also offer a fixed deposit interest calculator on their websites where for a certain amount of time, a customer can measure the return he will gain on spending a certain amount of money. 

The tax threshold for interest:

Banks are not allowed to deduct tax on any interest until they cross Rs. 10,000. This means that the bank would not subtract any tax if the gross interest paid by a customer on multiple fixed deposits amounts to Rs. 10,000. This offers small deposit holders comfort. 

Flexible tenures:

For a fixed deposit, the tenure is flexible and relies on the owners of the deposit. Each bank has its own minimum tenure guidelines, but the deposit holder can take the final decision. It is, therefore, possible to determine whether to redeem or continue the fixed deposit for the same period.

Fund for emergencies:

During, Financial emergency, an FD could provide you with a reliable financial source of comfort. In addition, if you do not wish to break the FD, you are still faced with the possibility of using a loan against the balance of the FD principal. Anyway, a Fixed Deposit account still gives confidence that a financial emergency will never be unprepared for you.

Easy liquidation:

Liquidating a fixed deposit is relatively straightforward. They can be liquidated online through net banking for FDs booked online as well. Otherwise, there is a method in most bank branches to liquidate the FD.

Senior Citizens get extra perks:

If you are a senior citizen who is retiring or about to retire, fixed deposits are much more advantageous. This is because fixed deposits appear to give senior citizens higher interest rates, ensuring you good yields on all your potential needs for retirement.

Loans against fixed deposit:

In the case of financial crises, an FD is a safe tool to maintain. It is very handy to contract a loan against a fixed deposit. Depending on the bank, you can take out a loan of up to 95% of the fixed deposit number. This makes it a reliable investment.

Thus, we always talk about how our savings will work for us when we stop working.