Pros And Cons Of Fixed Deposits As An Investment Option

Fixed deposits have been a popular investment option for Indians for many decades. According to a report by the Reserve Bank of India, deposits grew by 7.7% YoY to reach Rs. 147.24 lakh crore in December 2020. However, there are some lesser-known statistics that may surprise you. For instance, only 10% of Indians invest in financial assets, and fixed deposits account for more than half of the total financial savings. Furthermore, the interest rate on fixed deposits has declined from 7.5% in 2018 to 5.5% in 2021.

Let us discuss the pros and cons of fixed deposits as an investment option:

Pros of Fixed Deposits:

1. Guaranteed Returns:
One of the biggest advantages of investing in fixed deposits is the guaranteed returns. The returns on fixed deposits are fixed at the time of investment and do not change throughout the tenure of the deposit. This makes it a safe and predictable investment option.

2. Low Risk:
Fixed deposits are considered to be one of the safest investment options. They are not affected by market fluctuations and offer a fixed rate of return, irrespective of the economic conditions. This makes them an ideal investment option for risk-averse investors.

3. Liquidity:
Fixed deposits offer high liquidity. In case of an emergency, you can withdraw your funds from the fixed deposit before the maturity date. However, you may have to pay a penalty for premature withdrawal.

4. Tax Benefits:
Fixed deposits offer tax benefits under Section 80C of the Income Tax Act. You can claim a deduction of up to Rs. 1.5 lakh on the investment made in fixed deposits.

Cons of Fixed Deposits:

1. Low Returns:
While fixed deposits offer guaranteed returns, the returns are relatively low when compared to other investment options such as mutual funds, stocks, and real estate. Inflation can erode the value of the returns earned on fixed deposits over time.

2. Fixed Tenure:
Fixed deposits have a fixed tenure, and you cannot withdraw your funds before the maturity date without paying a penalty. This can be a disadvantage if you need liquidity in the short term.

3. Interest Rates:
Interest rates on fixed deposits are subject to change depending on the economic conditions. In a low-interest rate scenario, the returns on fixed deposits can be relatively low.

4. Taxation:
Fixed deposits are subject to taxation. The interest earned on fixed deposits is taxable, and the tax liability can reduce the effective returns earned on the investment.

Conclusion:
Fixed deposits are a safe and secure investment option, especially for risk-averse investors. They offer guaranteed returns, high liquidity, and tax benefits. However, the returns on fixed deposits are relatively low, and they have a fixed tenure. The interest rates on fixed deposits are subject to change, and the interest earned is taxable. Therefore, it is important to consider your investment objectives, risk appetite, and financial goals before investing in fixed deposits.

These tips are brought to you by the Experts and Financial Planners at HappyWise Financial Services. For any assistance in planning for your financial future, feel free to reach out to the Experts at HappyWise on Whatsapp.