Fixed deposits are the first thing that most people come to mind when they think of saving money. Instead of leaving money in the bank, saving it as fixed deposits gives you higher interest. But is saving money in fixed deposits a good investment or a bad one? The answer is, ‘It depends.’
Why Should You Consider Fixed Deposits?
Let’s peel this fixed deposit onion by considering why you should consider fixed deposits.
#1 Higher Interest When Compared to Savings Account
You have an account in a bank and leave your savings in your account for a year.
The interest you get on your money is about 2.8%. However, if you invest the same amount in a PNB Housing Fixed Deposit, your returns immediately jump to approximately 5%.
That is one part of the answer. In addition, fixed deposits should be considered because fixed deposit interest rates are higher than your savings bank account.
#2 Loan Against Fixed Deposits
Let’s say you are looking for a loan that you plan to repay within two years. You pay over 8% interest per annum if you take a personal loan. However, if you take a loan against a fixed deposit, you only pay approximately 5%. So that is the second reason for considering fixed deposits.
#3 Assured Interest
Most investments may provide higher interest than your fixed deposits. However, the keyword here is ‘may.’ This means that the assets may not work out due to economic volatility. If you do not have the means to hold on for the long term to let things settle, you may end up losing money in the short term.
Fixed deposits give you guaranteed returns. You are assured of the interest on your fixed deposit month over month irrespective of economic ups and downs. That is the third reason to consider fixed deposits.
Why Should You Avoid Fixed Deposits?
All the benefits of fixed deposits work if you are using them as one of the ways to diversify your wealth. Consider investing a little in fixed deposits instead of investing 100% of your savings in high-risk, high-return investments.
Having some amount in fixed deposits provides you with a safety net if everything else fails. However, they are downsides too. Here are a few factors to consider:
#1 Slower Growth Than Inflation
Fixed deposits pay higher returns than savings accounts. However, the fixed deposit interest rate is lower than the inflation. While fixed deposits give an interest of around 5%, the country’s inflation is growing by 6-7% a year.
This means your money in fixed deposit shrinks your funds instead of growing it over time. It is one reason to have a small amount in fixed deposits instead of the majority of your savings in them.
#2 Taxable Income
Interest earned on fixed deposits is taxable. This means your money is not only shrinking because of higher inflation. It is shrinking faster. Income from fixed deposits is part of your annual income. Fixed deposits get taxed at the same rate as your overall tax bracket.
One way of saving yourself from this extra burden is by investing in tax-saving fixed deposits. These deposits allow you to claim up to 1.5 lakh rupees tax-free. This does not mean these fixed deposits are tax-free. They are tax-free only if your investment is less than 1.5 lakhs.
If you invest more than that, you are still losing money. Calculate interest earned, how much tax you are paying, and what the inflation for the year is. You will realize that your money ends up growing by about -3% per year. Combat this by investing in higher return options to offset the loss.
#3 Fee To Break Fixed Deposits Prematurely
Fixed deposits are popular because you can break them at will and access your money. However, this comes with a cost. Banks usually charge up to 1% of the interest paid as a fee for breaking a fixed deposit prematurely.
The cost will add up if you terminate multiple fixed deposits simultaneously. But, sometimes, it offsets the benefit you get out of investing in this financial instrument.
Conclusion
Fixed deposits like the PNB Housing Fixed Deposit are safe, give assured returns, and are convenient. Consider this If this is what you’re looking for in your already diversified portfolio.
Do not consider fixed deposits if your portfolio is not diversified and you are looking for a long-term investment. So, depending on your need a fixed deposit can be a good investment or a bad investment. Invest wisely.