Pros:
1. Safety Of Principal: FDs are considered as one of the safest investment option because they are provided by the banks and also up to a certain amount, your principal is backed by Govt. Insurance. By this way, your principal amount is always safe.
2. Stable Returns: Compared to other investments, FDs give you a stable income via interest paid on a regular interval. This type of stable returns is for those who are afraid of the market volatility or those who don't want to invest in a highly volatile market.
3. Liquidity: While FDs have a fixed tenure almost everyone of them, but some banks or NBFC do have a flexible or partial withdrawal that comes with a penalty. These types of FDs can provide you with some liquidity when you need it in an emergency.
4. Easy To Understand: FDs are very straight forward investments. We can also calculate the interest for a regular interval payout via various online platform to calculate the interest or the banks itself have interest calculated regularly through their portal or an online interest calculator.
5. Tax Benefits: Some FDs can be opened under tax-saving schemes, these are mainly benefitted when you regularly pay tax on FDs which are open under or as Tax-Saving FDs. These can help you in tax deductions under certain clauses of Income-Tax Act.
We have talked about some advantages that are available when you open an Fixed Deposit Account in a bank, post office or any other NBFCs. Below are some points to be kept as a disadvantage to opening a fixed deposit account:
Cons:
1. Low Returns: FD interest rates have always been lower than other much riskier investments like stocks, mutual funds or real estates. Interest from FDs cannot beat the inflation when the inflation rates go high, also adjusted returns on FD is much lower than the inflation.
2. Fixed Tenure: Usually, FDs are opened for predetermined period or tenure, but in any emergency, you need the amount before the maturity period, you can get the same by paying penalties and also you may have to receive lesser interest rates on your principal.
3. Interest Taxation: The interest received on FDs could be taxed under taxable income once your interest amount reaches a certain limit. This can strategically and significantly reduce the income earn especially to the individual who fall under higher income tax slab. So invest wisely.
4. Lack Of Liquidity: There are flexibility in FDs with premature withdrawals and penalties. These FDs cannot be considered equal to liquid money that you save in your saving accounts or other investments.
5. Inflation Risk: FDs may not provide enough returns to beat the inflation. Over a period of time, if the rate of inflation goes high than FD interest rate, your purchasing power with that amount is of no use to you because that can't buy you things which you need or want.
6. Opportunity Cost: If an X amount is invested in a Fixed Deposit for a period or a tenure of time, then you may lose on some other high return investment opportunity for the same period or tenure of time.
7. Reinvestment Risk: There is always a risk in income received when there is a falling interest rate when you reinvest the amount or only the principal.
If you have invested a FD for a tenure like 5 years at an interest rate of 7%. The rate of interest is reduced to 5.5% after the third year for another 5 years, so after your first 5 years is over and you re-invest your amount, now you will get only 5.5% of interest for the invested amount.
For summary, Fixed Deposit are for those who want a fixed income on a regular basis and who are conservative minded and who want to stay away from the volatile market and also who wants to achieve a short-term goal. One should also always remember that the inflation rates change time to time but interest on FDs stay still, they don't differ so often and the purchasing power of your money in value decreases. Always consider your financial goals when opening a Fixed Deposit Account or is it wise enough to invest in other high return investment options.
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