Fixed deposits (FDs) have consistently been a go-to investment for individuals who prioritise stability and low risk, as opposed to market-linked investments like mutual funds and stocks.
Pros and Cons of Investing in Fixed Deposits
It is always advised to weigh in the pros and cons of opening an FD before parking your funds in the fixed deposit. Given below are a few points to help you make an informed investment decision:
Pros of Fixed Deposits
Predictable Returns: Fixed deposits offer predictable returns. Unlike market-linked investments, FDs provide investors with predetermined returns at an interest rate fixed during the time of investment. This helps investors to confidently plan and manage their finances.
Flexible Tenures: Most commonly FDs come with flexible tenure options, allowing investors to choose the duration that suits their financial goals. Whether short-term or long-term, investors can select a tenure ranging from a few months to several years, providing flexibility in aligning investments with their financial plans.
Easy Withdrawal: Fixed deposits offer easy withdrawal options, providing financial flexibility in emergencies or unexpected expenses. Many institutions allow premature or partial withdrawals, enabling you to access your funds before maturity with minimal penalties. This feature ensures your money remains accessible while still earning interest, making FDs a secure and versatile investment choice.
FD Laddering: Laddering involves splitting your investment into multiple fixed deposits with varying maturities, allowing you to benefit from higher interest rates on long-term deposits while maintaining regular access to funds. As each FD matures, you can reinvest or use the funds, ensuring a steady cash flow and reducing the risk of locking in a single interest rate.
Cons of Fixed Deposits
Lower Returns Compared to Market-linked Investments: While fixed deposits offer predictable returns than market-linked investments, the returns are relatively lower compared to equities and/or equity mutual funds.
Limited Liquidity: Fixed deposits come with a lock-in period, limiting access to funds until maturity. While premature withdrawals are possible, they often incur penalties, reducing the overall returns.