What is a Fixed Deposit?
Fixed Deposit is a kind of financial instrument that is offered by banks or non-banking financial institutions. It is a kind of deposit in which a sum of money is locked for a particular/fixed period. And the period for storage of money is decided by the depositor himself. In return, the depositor gets a fixed rate of interest. In this case, one can get more rate of interest as compared to the normal savings account. Since there is no involvement by markets in FDs, the risk is very low. This makes it a popular investment option for first-time investors and senior citizens.
Advantages of Fixed Deposit
1.Assured rate of return and Safe Investment
First of all, FDs are one of the safest options for investing in today’s market. There is very less risk in it as compared to Mutual Funds, as it is not driven by the market. One of the major reasons for preferring Fixed Deposit is that there is an assurance of rate of return. After investment in FDs, it’s obvious and guaranteed to get the fixed rate of interest.
2.Encourages Saving Habit
There is a famous quote by Warren Buffet “Do not save what is left after spending, but spend what is left after saving.” Saving is a habit not many excel but everybody wishes to develop so that it can help in times of need. Fixed Deposits help to develop the same. So the account holder would inadvertently save money, as FDs require a lump sum investment for a fixed period. Also, the investment is safe and has a profit of interest it encourages the people to invest in FDs. Also, premature withdrawals led to penalties.
3.Flexible Tenure
The tenure of Fixed Deposits is flexible. It depends upon the need and wish of the depositor. However, each bank has its minimum period as per the rules. But the final decision would be taken by the account holder only but subject to the rules.
4.Tax Benefit
The Fixed Deposit accounts along with the tax-saving option help to bring down the taxable income, Hence decrease the tax to be paid. These tax saver FDs give benefit under section 80 C of Income Tax Act, 1961. The interest earned on those FDs is taxable. But one can claim the deduction of a maximum of 1, 50,000 Rupees for the invested amount.
5.Loans against Fixed Deposit
The FD holders have an option to take loans against their Fixed Deposits. So a small percentage of interest will be charged over the fixed Deposit rate. By this one has not to pay the heavy rate of interest over loans and also there is no need to break the FDs One can take a loan up to 95% if the Fixed Deposit Amount depending on the respective Bank.
6.Easy Liquidation
Easy Liquidity implies that an asset can be converted into cash easily. It’s easy to liquidate the FD. Although the account holder will be charged with a penalty to liquidate the account before the due date, the FDs can be put to use whenever there is a need. So by way of FDs One always has a certain amount of money, which can be used in emergencies.
7.High Rate of Interest
The Rate Of interest that one gets on FDs is higher than that of the Savings account. So it is a more profitable option.
8.Higher Interest on FDs for Senior Citizens
The senior citizens usually offered high-interest rates of Fixed Deposits. These days most banking and non-banking institutions use this practice. The preferential rate of interest offered to senior citizens normally ranges from 0.25% to 0.65% more than the standard rate of interest on Fixed Deposit.
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