Advantages & Disadvantages of investing in FD (Fixed Deposit)

FD (Fixed Deposit) - the most preferred investment in India

Financial Freedom can be accomplished just when an investor settles on a very much informed financial choice. The investor should put forth an attempt to understand the characteristics of the product in which the person needs to invest. The investor ought to assess the upsides and downsides of the said product prior to investing it.

A fixed deposit is a well established investment choice for Indian investors. It is perhaps the most favored investment vehicles in India. Fixed Deposit is easy to understand, can be opened effectively, and taking care of and dealing with a FD is without bother for a large portion of us.

FDs are viewed as safe, liquid, and give guaranteed interest income. A huge number of Indians favor the guarantee of a FD.

Benefits of investing in Fixed Deposit

FD can be opened in any government sector, private sector and cooperative banks. So you can open a FD in the bank which is closest to you.

An interest rate is fixed in the FD. So you know how much interest you will procure on the amount invested. Maturity amount is likewise known to you at the hour of opening a Fixed Deposit.

FD is considered as one of the most secured debt instrument as the default rate in FD is negligible. Principal and interest both are safe and secure gave you have your FD in a presumed bank.

Various tenures FDs are accessible as per the requirement of the customer. It implies according to the time skyline of your objective you can plan the tenure of the FD.

(Also Read: Difference between Credit card, Personal loan and Credit line)

You can break your FD prematurely if there should be an occurrence of an emergency. FD can be liquidated quicker than other traditional debt instruments. The money will be credited to your account on the very same day or following day.

On the off chance that you invest money in FD for a very long time it is qualified for the deduction under Section 80C of income Tax Act. It implies on the off chance that you make a FD of Rs 150000 for a very long time you can claim the deduction of 150000 from your income under section 80C.

As FD is considered as the most secured debt instrument, investors like to keep their emergency fund in Fixed Deposit. In the event that on the maturity date you neglect to restore your FD, it can naturally get renewed for one year by the bank and you won't lose your interest in any event, for a solitary day.

During a cash crunch or emergency, individuals will in general search for loans from a great deal of sources. One of those sources can be taking loans against fixed deposits (FD) from banks.

While taking an advance against FD, banks keep the FD as collateral or security. This sort of advance is appropriate for individuals who have a harmed FICO rating or the individuals who don't meet the eligibility criteria and can't get a personal credit from the bank.

Interest rates on loans taken against FDs are similarly lower in correlation with other traditional loans yet higher than interest rates on FDs.

Generally, the interest rate on a credit against FD is around 1 to 3 percent higher than the interest rate of the FD. This rate contrasts from bank to bank. It ought to be noticed that tenure of the advance against FD can't be more than the tenure of the FD itself.

Bank cuts TDS at the rate of 10% every year on the interest procured on the FD independent of an investor's tax section. It is the duty of the investor to pay the excess tax on the off chance that he has a place with a 20% or 30% section.

In this advanced and techno-friendly world, one can open Fixed Deposit from home through the online mind-set in one single click. You can have a choice of Flexi FD where a portion of your money is moved from your Saving account to FD where you can acquire more interest than the standard savings account. That money is as yet accessible to you.

You can withdraw the amount from Flexi FD if there should arise an occurrence of emergency any time through online state of mind or by visiting your branch.

Disadvantages of investing in Fixed Deposit

The greatest hindrance of FD is its return. The predominant returns offered by bank FDs won't ready to beat the inflation. The interest rate of FD is from 6% to 8%. Inflation is considered as 7%. So the genuine rate of return is marginal.

Interest acquired from FD is taxable in the possession of the investor. It is a commitment of the investor to pay his tax on the FD interest as per his tax piece. So this product isn't at all reasonable for the individuals who are from the most elevated section as their genuine rate of return will be negative in the wake of thinking about inflation and tax.

If there should arise an occurrence of emergency on the off chance that you break your FD before its maturity you need to pay a 1% penalty. The penalty amount will be deducted from the interest procured up to that date.

Your covetousness to procure more interest can land you in a tough situation on the off chance that you put your money in any small cooperative bank or Patpedhi (very small bank). Your FD will be at risk. In the event that the awful financial condition of that specific bank, the bank can default interest as well as the principal.

Your deposits – both principal and interest – at commercial and cooperative banks are guaranteed up to Rs 5 lakh for every bank. Along these lines, if a bank were to default and unfit to repay your deposit, the Deposit Insurance and Credit Guarantee Corporation were to cover you up to Rs 1 lakh. In the event that your misfortunes are greater than Rs 1 lakh for every bank, you may get no compensation.

(Also Read: Cheque Truncation System (CTS))

The investor believes that FD is a without risk investment choice yet it conveys a risk which is called inflation risk. Low returns from FDs may not beat even the common rate of inflation.

It additionally conveys focus risk. Some moderate, risk-loath investors like to set aside cash just through FDs. This is likewise a risk. Having all your money concentrated into one form of the asset implies that you don't have expansion in your portfolio.

Fixed Deposits should be utilized shrewdly. You ought to think about it as one of the choices for your Debt investment. Putting every one of your savings just in FD can make you poor rather than rich. It doesn't consider inflation. The investor ought to invest in an asset blend that is appropriate for his age and risk profile.

In this way, to acquire more significant yields, for broadening of assets, and to beat inflation, you should invest through mutual funds too. Through mutual funds, you additionally have more tax-proficient instruments where your returns aren't completely taxable in specific conditions.

The astute investor won't stop for a second to face the calculated challenge which thusly encourages him to accomplish financial freedom.