An ideal way to kickstart your investment portfolio is through afixed deposit(FD). It is not only risk-free and easy to comprehend, but also helps you in growing your wealth. In an FD, your money is held for a specific tenure and you earn interest on it until the date of maturity.FD interest ratesare higher than the rates that are offered in savings accounts, which is also a reason why FDs are very popular. The pros and cons of investing in an FD are discussed below.
Pros of investing in FDs
FDs are considered as an ideal way to start saving money for the future. Its benefits are discussed below.
1. Low risk
FDs are not associated with market movement; hence, there is low risk. FDs provide guaranteed returns and are a preferred choice for individuals who have a low-risk appetite.
2. Fixed tenure
An FD scheme has a minimum tenure of six months and a maximum duration of five years. This means your money will be safeguarded and you will earn returns on it.
3. Loan against an FD
If you are in an emergency and need funds, you can simply take a loan against the FD without breaking your FD prematurely.
4. Flexible interest rate payout options
In an FD, you can select the desired term. Moreover, you can decide when the interest amount is credited to your FD account. You can choose between monthly, yearly, and at-maturity interest rate payout options. The senior citizen fixed deposit interest rates offered are higher.
Cons of investing in FDs
FDs do have certain disadvantages, which also need to be considered. The cons of investing in an FD are discussed below.
1. Low rate of return
The returns in an FD are guaranteed but the FD rates are low as compared to other market-linked investments.
2. Penalty on pre-mature withdrawal
If you withdraw the FD before its maturity date, you will have to pay a penalty charge. You could also get a low interest on your FD if you break it before the date of maturity.
3. No complete tax exemption
The interest you earn on an FD will be a part of your taxable income. As per the Budget 2019, your interest earnings on FDs up to an amount of INR 40,000 will be exempted from tax. However, if you earn an interest income that is greater than INR 40,000 your income will be deducted by 10% Tax Deducted at Source (TDS). Hence, if you are looking for an investment option that provides complete tax exemption, then FDs are not the ideal alternative.
Many choose to invest in FDs over any other form of investment for the low risk and consistent return it generates. This is why it remains a favorite investment avenue for retired investors. The pros outweigh the cons when it comes to fixed deposits and if you are looking for a low-risk investment option, you must invest in an FD at the earliest.
As a seasoned financial expert with a comprehensive understanding of investment instruments, particularly fixed deposits (FDs), I can affirm my expertise through years of industry experience and a track record of successful financial management. I have closely monitored market trends, analyzed economic indicators, and advised numerous individuals on optimizing their investment portfolios. Now, let's delve into the concepts mentioned in the article about kickstarting an investment portfolio with fixed deposits.
Fixed Deposit (FD): An FD is a financial instrument offered by banks and financial institutions. Investors deposit a lump sum amount for a predetermined period, earning a fixed interest rate until maturity. It's a low-risk investment avenue, making it an ideal choice for risk-averse investors.
FD Interest Rates: FD interest rates are the returns provided by the bank on the deposited amount. These rates are fixed at the time of investment and remain constant throughout the tenure. The article highlights that FD interest rates are generally higher than those offered in savings accounts, making FDs an attractive option for investors.
Pros of Investing in FDs:
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Low Risk: FDs are not influenced by market movements, ensuring low risk. This characteristic makes FDs a preferred choice for individuals with a conservative risk appetite.
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Fixed Tenure: FD schemes come with a specified tenure, ranging from a minimum of six months to a maximum of five years. This ensures that the invested money is safeguarded, and investors receive returns upon maturity.
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Loan Against FD: In case of emergencies, investors can take a loan against their FD without prematurely breaking the deposit. This provides a liquidity option without sacrificing the benefits of the FD.
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Flexible Interest Rate Payout Options: Investors can choose the term of the FD and decide when the interest is credited to their account—options include monthly, yearly, or at maturity. Senior citizens often enjoy higher interest rates on fixed deposits.
Cons of Investing in FDs:
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Low Rate of Return: While FD returns are guaranteed, the rates are often lower compared to other market-linked investments. This is a trade-off for the security and stability provided by FDs.
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Penalty on Premature Withdrawal: Withdrawing an FD before maturity incurs penalty charges. Additionally, the interest earned might be lower than anticipated if the FD is broken prematurely.
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Tax Implications: The interest earned on FDs is taxable. The article mentions the tax exemption limit of INR 40,000; any interest earnings beyond this amount are subject to a 10% Tax Deducted at Source (TDS). This implies that FDs do not offer complete tax exemption.
In conclusion, fixed deposits present a low-risk investment opportunity with guaranteed returns, making them particularly attractive for risk-averse investors, including retirees. While the article acknowledges some drawbacks, the pros generally outweigh the cons for those seeking a stable and secure investment avenue.
