Are Fixed Deposits Good Or Bad Investments?

There are three things you are guaranteed in India: Good street food, colourful festivals and the fact that your parents will invest in Fixed Deposits. This traditional form of investment is usually part of every other Indian investor’s portfolio because of the fixed returns and safety.

But historical data suggests that Indian investors are moving away from FDs. In 2017-18, the percentage of FDs fell from 58.6% to 57.7%. If you go back to 2008, the numbers suggest that FDs have seen a sharp decline from 63.5% to 58.6%. You can consult a Cube Wealth Coach or download the Cube Wealth App.

So if you’re a new investor wondering whether you should invest in FDs, this blog is for you. Let’s start off by understanding how fixed deposits work.

What Is A Fixed Deposit?

An FD is a conservative investment option that several Banks, Post offices, and Non-banking Financial Companies (NBFCs) offer. You can choose a fixed tenure based on your investment goals. The deposit earns an interest once this duration is completed. The interest is earned over the entire duration of the investment. 

The interest rate is locked-in at the start of a fixed deposit and remains unchanged throughout tenure regardless of market fluctuations. But one big catch - there is a penalty for early withdrawal. You cannot withdraw investment before the end of the maturity period. This penalty varies from bank to bank but is applicable across all. 

Types Of Fixed Deposits

1. Normal Fixed Deposits

• Simple bank fixed deposits
• Have a fixed tenure that ranges from 7 days to 10 years
• One time lump sum investment
  

2. Corporate Fixed Deposits

• Offered by Financial and NBFCs
• Fixed tenure ranges from months to years
• Comparatively higher returns Vs normal FDs
  

3. Flexi Fixed Deposits

• Combination of Demand Deposit and Fixed Deposit
• Offers liquidity of savings a/c and reasonable high returns of an FD
• Has the Auto-sweep feature that transfers the excess balance to the FD
• Excess balance amount is decided by the investor
• Balance deposited for a default term of 1 year
  

4. Senior Citizen Fixed Deposits

• For investors over the age of 60
• Higher interest rates compared to normal FDs
• Flexible tenure
  

5. Tax-saving Fixed Deposits

• Tax exemption on the principal amount
• Minimum deposit is ₹1.5 lakhs
• Fixed lock-in period of 5 years
  

6. Cumulative Fixed Deposits

• Interest compounded quarterly, half-yearly, or yearly
• Interest earned is paid after maturity
  

7. Non-cumulative Fixed Deposits

• Earned interest paid out monthly, quarterly, half-yearly, or annually
• Regular payments
  

8. NRO Fixed Deposits

• For Non-resident Indians
• NRIs can deposit the money earned in India in the NRO FD account
• Interest can be transferred to the country of residence
• Principal amount can be transferred back to a certain limit 
  

9. NRE Fixed Deposits

• For NRIs
• NRIs can invest money earned abroad in the NRE fixed deposit account
• Entirety of the interest and principal amount can be transferred back
  

5 Things To Know Before Investing In An FD

1. Safety

An FD is a relatively safe investment option. Market fluctuations do not impact the interest rate that you get on an FD. However, there are mutual funds like liquid funds that can provide similar if not better, level of safety and returns.  

2. Fixed Lock-In Period

The money invested in an FD cannot be withdrawn before the end of the tenure. Moreover, there are penalties for early withdrawals. In contrast, mutual funds (except ELSS funds) offer higher liquidity and do not charge penalties for early withdrawals.

3. Reasonable Interest Rates

FDs offer interest rates in line with the low-risk profile. There was a time when FD interest rates ranged from 11-13%. But these days, FDs offer lower interest rates (5-6.5%) than liquid funds (7-9%).

4. Taxes

Tax saving FDs offer benefits under section 80c on investments up to ₹1.5 lakhs. But there are more tax efficient investments out there like ELSS funds that have a lower lock-in period and offer better returns. 

5. Benefits Senior Citizens

Investors above the age of 60 can get a better interest rate with Senior Citizen FDs compared to regular FDs.

What Are The Risks Of Investing In Fixed Deposits?

1. Lock-In Period

The principal amount cannot be withdrawn before maturity. This means that money once invested is stuck for the duration of the deposit. There is a penalty for early withdrawal too. In the event of an emergency, this liquidity risk can be detrimental.  You can consult a Cube Wealth Coach or download the Cube Wealth App.

2. Bank Defaults

A bank defaulting is rare but definitely possible. But ₹5 lakhs per person per bank is guaranteed by the Deposit Insurance and Credit Guarantee Corporation (DICGC). This includes the principal and interest. Any amount over ₹5 lakh is subject to risk.

3. Low Interest Rates

The locked-in interest rate never changes. This is both a cause for concern and a safety net. Market fluctuations don't impact the locked-in interest rate but neither is your money earning more interest depending on the growth cycle of the economy. 

Is Investing In A Fixed Deposit A Good Decision?

FDs find their way into the portfolio of conservative investors due to the safety net that they offer. But at the same time, the less than stellar interest rates mean that the investment is not growing your wealth by an impressive margin.

If what you are looking for is wealth creation, then there are better investment options than FDs. Read on to know more. 

List Of Better Alternatives To FDs

FDs are low-risk, low-reward investments perfect for senior citizens to investors looking for a safe investment option. But here is a list of investment options better than FDs based on returns, liquidity, and lock-in period:

1. Liquid funds (7-9%)

2. Debt funds (8-10%)

3. Equity funds (11-16%)

4. ELSS funds (11-16%)

5. Large cap stocks (12-16%)

6. Alternative investments (8.5-12%)

Read this blog for a detailed take on investment options better than FDs 

Should You Invest In Mutual Funds Instead Of Fixed Deposits?

Mutual funds may be considered to be a better investment option than FDs when it comes to:

• Historical returns
• Indexation benefits
• Professional management
• Liquidity

But does that mean you should invest in mutual funds or FDs? Why not both, even? A one size fits all approach may not work here.

That's because whether or not you should invest in mutual funds depends on your age, investment goals, risk appetite, and other factors like income. 

Moreover, the choice would depend on the health of your current investment portfolio. Thus, it would be wise to talk to a trained expert and get a thorough risk analysis done before choosing any investment option.

FAQs Around Fixed Deposits

1. Is FD a good investment?

A bank fixed deposit offers predictable returns in the range of 4.5-5.5% along with above average safety. However, most FDs carry a lock-in period and if you're willing to power through that, it may be a potential investment option.

But you must also understand that there are better investment options like p2p lending, asset leasing, and several liquid funds that offer better returns. At the end of the day, it depends on what your investment portfolio needs.  You can consult a Cube Wealth Coach or download the Cube Wealth App.Y

2. Can you lose money in fixed deposit?

FDs are relatively safer than many other investment options but they are prone to risks as well. Broadly speaking, yes, you can lose money in a fixed deposit in two ways:

• Bank Default: ₹5 lakhs per person per bank is guaranteed by the Deposit Insurance and Credit Guarantee Corporation (DICGC). However, anything beyond that may not be recoverable if the bank defaults.
• Inflation: Rising inflation can impact FD returns. For example, if the rate of inflation is 5% and you invest in an FD with 4.5% returns, you'll actually lose 0.5%. That's why market related investments like stocks and mutual funds are becoming popular - they are known to comfortably outperform inflation.

3. Can I withdraw my fixed deposit before the maturity date? 

Ans. While premature withdrawal is possible, it usually comes with penalties and reduced interest rates. The terms and conditions for premature withdrawal vary by bank and the specific fixed deposit scheme.

4. Are fixed deposits insured against losses?

Ans. In many countries, fixed deposits are insured up to a certain limit by a government agency or deposit insurance corporation, providing protection in case the bank or institution fails.

Conclusion

Whether fixed deposits are good or bad investments depends on your financial goals and risk tolerance. Fixed deposits are known for their safety and predictability, making them a suitable choice for conservative investors who prioritize capital preservation. They can be a part of a diversified investment portfolio, serving as a low-risk, stable element.

However, fixed deposits typically offer lower returns compared to more dynamic investment options. They might not be the best choice for those seeking to beat inflation and maximize wealth over the long term. In such cases, other investment vehicles like stocks, bonds, or real estate may offer better returns, albeit with higher associated risks.

Wondering what are alternative investments? Watch this video to learn more