Fixed deposits are among the safest and most convenient investing instruments in the Indian money and capital market. The primary reason is the fixed return on investments and the security process associated with financial institutions.
Fixed deposits can be the best way to kick-start your investment journey. Investors find them easy to understand and earn a fixed income through returns. Interestingly, the higher interest and less tenure provided by other forms of investments lower the attraction of FDs.
This leads to confusion in the minds of investors. This article will discuss the reality behind fixed deposits and help you evaluate if it is the right investment choice for you.
Fixed deposit is a conservative option for investment offered by various banking and non-banking financial institutions like banks and post offices. The investor must choose a fixed tenure based on their goals and the FD interest. The interest earned is decided while making the investment and remains fixed. A person can reap interest payments at regular intervals-monthly, quarterly, half-yearly, or yearly. One can also choose to get the interest and the principal money at the end of the tenure.
Some advantages of investing in fixed deposits are
Fixed deposits pose less risk and offer fixed income on interests. Yet, there are a few disadvantages of investing in such investments. Below are a few of the challenges an individual faces while investing in FDs
While FDs are safer than many other investment alternatives, they are not without risk. In general, you can lose money in a fixed deposit in one of two ways:
FDs are low-risk, low-reward investments ideal for older persons and investors seeking secure investments. However, the following investment choices outperform FDs in terms of returns, liquidity, and lock-in period:
Liquid Mutual Funds (7-9% return) are a suitable alternative to fixed deposits since they provide higher interest rates and faster liquidity than the average FD. Thus, you may get your money considerably faster during a crisis without incurring any losses.
You would have to "break" the FD, as we say in India, and even face losses in the case of fixed deposits. Debt funds (interest rate: 8-10%), digital gold (9.5-10%), and conservative mutual funds (11-16%) are some other investing alternatives (8.5-12%). The risks increase, but so does the payout.
In general, fixed deposits are not suitable investment alternatives in terms of returns due to the availability of alternative investment options. However, they may appear to be viable solutions for safety. They are often considered safer because they are not directly tied to the markets. Fixed deposits will not attract you unless you are a conservative risk-averse investor.
However, most FDs have a lock-in period. Thus, if you're prepared to invest your money for that period, it may be a good investment. However, you should be aware that there are superior investing choices available, such as asset leasing, peer-to-peer lending, and various liquid funds. In the end, it comes down to what your investment portfolio requires.
Thus, before considering investing or withdrawing your money from fixed deposits, first understand your risk-return ratio, the period you can give your money to grow, and other important factors discussed above.