Saving Schemes Vs. Fixed Deposits: Making The Right Choice

One of the most common dilemmas that investors face is how to save and grow their money in a safe and profitable way. There are many options available in the market, but two of the most popular ones are saving schemes and fixed deposits. Both of these offer attractive returns, tax benefits, and security, but they also have some differences that make them suitable for different types of investors.

Saving schemes are investment plans that are backed by the government and offer guaranteed returns and tax exemptions. Some examples of saving schemes in India are Public Provident Fund (PPF), National Savings Certificate (NSC), Sukanya Samriddhi Yojana (SSY), etc. These schemes are ideal for long-term investors who want to save for specific goals such as retirement, education, or marriage.

Fixed deposits are deposits that are made with banks or other financial institutions for a fixed period of time and earn a fixed rate of interest. Some examples of fixed deposit schemes in India are bank FDs, company FDs, post office FDs, etc. These schemes are ideal for short-term investors who want to earn higher interest rates, have flexibility, and access their money easily.

Both saving schemes and fixed deposits have their own benefits and drawbacks, and choosing the right option depends on various factors such as one’s financial goals, risk appetite, and time horizon. The purpose of this blog is to help you understand the features, advantages, and disadvantages of saving schemes and fixed deposits and to guide you in making the right choice based on your needs and preferences.

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Saving Schemes: What Are They And How Do They Work?

Saving schemes are investment plans that are offered by the government or its agencies to encourage people to save and invest their money.

These schemes have some common features and characteristics that make them attractive for investors. Some of these are:

• Tax Benefits: Saving schemes offer tax exemptions or deductions under various sections of the Income Tax Act, such as Section 80C, Section 80D, Section 10(15), etc. This means that the amount invested, the interest earned, or the maturity amount are either fully or partially exempt from tax, depending on the scheme.
• Guaranteed Returns: Saving schemes offer a fixed and assured rate of interest that is usually higher than the market rate. The interest rate is decided by the government and is revised periodically. The interest rate is also compounded annually or quarterly, which increases the effective yield of the investment.
• Government-Backed Security: Saving schemes are backed by the government and its agencies, which means that the principal and interest are guaranteed and safe. There is no risk of default or loss of money due to market fluctuations or fraud.
• Long-term Investment: Saving schemes have a long maturity period, ranging from 5 years to 15 years or more. This means that the money is locked in for a long time and cannot be withdrawn before maturity, except in some cases of emergency or specific conditions. This helps in building a corpus for long-term goals and also inculcates the habit of saving and investing.

Different Saving Schemes In India

There are different types of saving schemes in India, each with its own eligibility criteria, maturity period, interest rate, and tax benefits. Some of the most popular saving schemes are:

• Public Provident Fund (PPF): PPF is a voluntary saving scheme that allows anyone to open an account with a minimum of Rs. 500 and a maximum of Rs. 1.5 lakh per year. The interest rate is currently 7.1% per annum and is compounded annually. The maturity period is 15 years, which can be extended for another 5 years. The investment, interest, and maturity amount are exempt from tax under Section 80C. PPF also allows partial withdrawals and loan facilities after certain years.
• National Savings Certificate (NSC): NSC is a certificate scheme that can be purchased from any post office with a minimum of Rs. 100 and no maximum limit. The interest rate is currently 6.8% per annum and is compounded annually. The maturity period is 5 years. The investment is eligible for tax deduction under Section 80C, but the interest is taxable. NSC can also be used as collateral for loans.
• Sukanya Samriddhi Yojana (SSY): SSY is a saving scheme for the girl child that can be opened by the parents or legal guardians of a girl child below the age of 10 years. The minimum amount is Rs. 250, and the maximum is Rs. 1.5 lakh per year. The interest rate is currently 7.6% per annum and is compounded annually. The maturity period is 21 years or when the girl child gets married, whichever is earlier. The investment, interest, and maturity amount are exempt from tax under Section 80C. SSY also allows partial withdrawal for the education or marriage of the girl child after she attains the age of 18 years.

Fixed Deposits: What are they and how do they work?

Fixed deposits are deposits that are made with banks or other financial institutions for a fixed period of time and earn a fixed rate of interest. These are also known as term deposits or time deposits.

Some of the features and characteristics of fixed deposits are:

• Higher interest rates: Fixed deposits offer higher interest rates than saving schemes, as they are based on market conditions and the duration of the deposit. The longer the tenure, the higher the interest rate. The interest rate is also fixed at the time of opening the deposit and does not change during the term. The interest rate can vary from 4% to 8% per year, depending on the bank, the amount, and the tenure.
• Flexibility: Fixed deposits offer flexibility in terms of choosing the amount, the tenure, and the frequency of interest payout. One can deposit any amount from Rs. 100 to Rs. 10 crore or more for any period from 7 days to 10 years or more. One can also opt for a monthly, quarterly, half-yearly, or annual interest payout or reinvest the interest to get a higher maturity amount.
• Liquidity: Fixed deposits offer liquidity, as one can withdraw the money before the maturity date, subject to some penalty charges. One can also take a loan against the fixed deposit, up to 90% of the deposit amount, at a lower interest rate than other loans. One can also break the deposit into smaller parts and withdraw only the required amount without affecting the rest of the deposit.
• Short-term investment: Fixed deposits are suitable for short-term investors who want to earn higher returns, have access to their money, and do not want to take any risk. Fixed deposits can help in meeting short-term goals such as buying a car, going on a vacation, or paying for an emergency.

Saving Schemes vs. Fixed Deposits: A Comparative Analysis

Saving schemes and fixed deposits are both popular investment options that offer attractive returns, tax benefits, and security. However, they also have some differences that make them suitable for different types of investors.

Advantages and Disadvantages of Saving Schemes

Saving schemes have the following advantages:

• They offer tax exemptions or deductions on the investment, interest, and maturity amount, which can reduce the tax liability and increase the net returns.
• They offer guaranteed and fixed returns that are usually higher than the market rate, which can ensure a steady and predictable income stream.
• They are backed by the government and its agencies, which means that the principal and interest are safe and secure, and there is no risk of default or loss of money.
• They are ideal for long-term investors who want to save for specific goals such as retirement, education, or marriage, as they have a long maturity period and cannot be withdrawn before maturity, except in some cases of emergency or specific conditions.

Saving schemes have the following disadvantages:

• They have a low liquidity, as the money is locked in for a long time and cannot be withdrawn before maturity, except in some cases of emergency or specific conditions. This can limit the access to the money and create a cash crunch in case of urgent needs.
• They have a low flexibility, as the amount, tenure, and frequency of investment are fixed and cannot be changed once the account is opened. This can restrict the ability to adjust the investment according to the changing needs and preferences.
• They are affected by inflation, as the interest rate is fixed and does not change with the market conditions. This can erode the purchasing power of the money and reduce the real returns.

Advantages and Disadvantages of Fixed Deposits

Fixed deposits have the following advantages:

• They offer higher interest rates than saving schemes, as they are based on the market conditions and the duration of the deposit. The longer the tenure, the higher the interest rate. This can maximize the returns and generate more income.
• They offer flexibility in terms of choosing the amount, tenure, and frequency of interest payout. One can deposit any amount for any period and opt for monthly, quarterly, half-yearly, or annual interest payout, or reinvest the interest to get a higher maturity amount. This can suit the different needs and preferences of the investors.
• They offer liquidity, as one can withdraw the money before the maturity date, subject to some penalty charges. One can also take a loan against the fixed deposit, up to 90% of the deposit amount, at a lower interest rate than other loans. One can also break the deposit into smaller parts and withdraw only the required amount, without affecting the rest of the deposit. This can provide easy access to the money and meet the urgent needs.

Fixed deposits have the following disadvantages:

• They have tax implications, as the interest earned on fixed deposits is taxable as per the income tax slab of the investor. This can increase the tax liability and reduce the net returns. There are some tax-saving fixed deposits that offer tax deduction under Section 80C, but they have a lock-in period of 5 years and do not allow premature withdrawal or loan facility.
• They have penalty charges, as withdrawing the money before the maturity date can attract some penalty charges, which can vary from 0.5% to 1% of the deposit amount. This can reduce the returns and affect the income.
• They have risk factors, as they are not backed by the government and depend on the credibility and stability of the bank or the financial institution. There is a risk of default or loss of money in case of bankruptcy or insolvency of the bank or the financial institution. The deposit insurance scheme covers only up to Rs. 5 lakh per depositor per bank.

Comparison of Saving Schemes and Fixed Deposits

The following table compares some of the key parameters of saving schemes and fixed deposits, such as interest rates, tax benefits, maturity period, risk level, etc.

How to Choose the Right Option for You?

Choosing between saving schemes and fixed deposits can be a difficult decision, as both have their own pros and cons. The right option for you depends on various factors such as your financial goals, risk appetite, time horizon, inflation, liquidity, diversification, etc.

Factors to Evaluate Before Choosing a Saving Scheme or a Fixed Deposit

Before investing in a saving scheme or a fixed deposit, you should consider the following factors:

• Financial goals: You should have a clear idea of what you want to achieve with your investment, such as saving for retirement, education, marriage, or any other specific goal. This will help you determine how much money you need to invest, how long you need to invest, and what kind of returns you expect from your investment.
• Risk appetite: You should assess your risk tolerance, or how much risk you are willing to take with your investment. This will help you decide how much security and stability you need from your investment and how much volatility and uncertainty you can handle. Generally, saving schemes are suitable for low-risk investors, while fixed deposits are suitable for moderate-risk investors.
• Time horizon: You should consider how long you want to stay invested or how soon you need to access your money. This will help you choose the appropriate maturity period and liquidity level for your investment. Generally, saving schemes are suitable for long-term investors, while fixed deposits are suitable for short-term investors.
• Inflation: You should factor in the impact of inflation, or the rise in the prices of goods and services over time, on your investment. This will help you determine the real returns and the purchasing power of your money. Generally, saving schemes are affected by inflation, as the interest rate is fixed and does not change with market conditions, while fixed deposits are less affected by inflation, as the interest rate is variable and market-linked.
• Liquidity: You should evaluate how easily you can convert your investment into cash or how quickly you can withdraw your money. This will help you meet your urgent needs and emergencies. Generally, saving schemes have low liquidity, as the money is locked in for a long time and cannot be withdrawn before maturity, except in some cases, while fixed deposits have high liquidity, as the money can be withdrawn before maturity, subject to some penalty charges.
• Diversification: You should diversify your investment portfolio, or spread your money across different types of investment options, to reduce your risk and increase your returns. This will help you balance your risk-reward ratio and cope with market fluctuations. Generally, saving schemes and fixed deposits can be used as complementary investments, as they have different features and characteristics that can suit different needs and preferences.

Tips or Strategies to Optimize Your Returns and Minimize Your Risks

After choosing a saving scheme or a fixed deposit, you can follow some tips or strategies to optimise your returns and minimise your risks, such as:

• Splitting your investment: You can split your investment into smaller parts and invest in different saving schemes or fixed deposits, with different interest rates, maturity periods, and tax benefits. This will help you diversify your portfolio, reduce your risk, and increase your returns.
• Reinvesting your interest: You can reinvest your interest earned on your savings scheme or fixed deposit instead of taking it out as cash. This will help you compound your interest, increase your maturity amount, and save tax on your interest income.
• Laddering your deposits: You can ladder your deposits or invest in multiple fixed deposits with different maturity dates, such as 1 year, 2 years, 3 years, etc. This will help you create a regular income stream, have access to your money at different intervals, and take advantage of changing interest rates.

Conclusion

Saving schemes and fixed deposits are two common types of investment options that offer attractive returns, tax benefits, and security. However, they also have some differences that make them suitable for different types of investors. Choosing the right option depends on various factors such as your financial goals, risk appetite, time horizon, inflation, liquidity, diversification, etc. You should also follow some tips or strategies to optimize your returns and minimize your risks, such as splitting your investment, reinvesting your interest, laddering your deposits, etc.

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FAQs Related To Saving Schemes And Fixed Deposits

1. What are the benefits of investing in saving schemes and fixed deposits?

Investing in saving schemes and fixed deposits can help you save and grow your money in a safe and profitable way. Some of the benefits are:

• You can earn attractive returns, tax benefits, and security on your investment.
• You can choose from different types of saving schemes and fixed deposits, based on your needs and preferences.
• You can diversify your portfolio and reduce your risk by investing in both saving schemes and fixed deposits.
• You can create a regular income stream, have access to your money, and meet your short-term and long-term goals.

2. What are the drawbacks of investing in saving schemes and fixed deposits?

Investing in saving schemes and fixed deposits also has some drawbacks that you should be aware of. Some of the drawbacks are:

• You may have to pay tax on the interest earned on fixed deposits, which can reduce your net returns.
• You may have to pay penalty charges if you withdraw your money before the maturity date from fixed deposits, which can affect your income.
• You may face the risk of default or loss of money in case of bankruptcy or insolvency of the bank or the financial institution that offers fixed deposits.
• You may lose the purchasing power of your money due to inflation, especially if you invest in saving schemes with a fixed interest rate.

3. How to compare the interest rates of saving schemes and fixed deposits?

The interest rates of saving schemes and fixed deposits are based on different factors and can vary from time to time. Some of the factors are:

• The interest rate of saving schemes is fixed and guaranteed by the government and is usually higher than the market rate. The interest rate is decided by the government and is revised periodically. The interest rate is also compounded annually or quarterly, which increases the effective yield of the investment.
• The interest rate of fixed deposits is variable and market-linked and is higher for longer tenure. The interest rate is fixed at the time of opening the deposit and does not change during the term. The interest rate can vary from 4% to 8% per annum, depending on the bank, the amount, and the tenure.

You can compare the interest rates of saving schemes and fixed deposits by using online calculators or tools, such as the ones available on the websites of the banks, the post office, or the financial institutions that offer these schemes.

4. How to choose the best saving scheme or fixed deposit for me?

Choosing the best saving scheme or fixed deposit for you depends on various factors, such as your financial goals, risk appetite, time horizon, inflation, liquidity, diversification, etc. You should consider these factors before investing in any saving scheme or fixed deposit, and compare the features, benefits, and drawbacks of different options. Some of the tips to choose the best saving scheme or fixed deposit for you are:

• If you want to save for long-term goals, such as retirement, education, or marriage, and have a low risk appetite, you can opt for saving schemes, such as PPF, NSC, SSY, etc., which offer tax benefits, guaranteed returns, and government-backed security.
• If you want to earn higher returns, have flexibility, and access your money easily, and have a moderate risk appetite, you can opt for fixed deposits, such as bank FDs, company FDs, post office FDs, etc., which offer higher interest rates, liquidity, and loan facility.
• If you want to balance your risk-reward ratio and cope with market fluctuations, you can opt for both saving schemes and fixed deposits, and diversify your portfolio. You can also split your investment into smaller parts and invest in different saving schemes or fixed deposits, with different interest rates, maturity periods, and tax benefits.

5. How to optimize my returns and minimize my risks when investing in saving schemes and fixed deposits?

Investing in saving schemes and fixed deposits can help you optimize your returns and minimize your risks, if you follow some tips or strategies, such as:

• Reinvest your interest earned on your saving scheme or fixed deposit, instead of taking it out as cash. This will help you compound your interest, increase your maturity amount, and save tax on your interest income.
• Ladder your deposits, or invest in multiple fixed deposits with different maturity dates, such as 1 year, 2 years, 3 years, etc. This will help you create a regular income stream, have access to your money at different intervals, and take advantage of changing interest rates.
• Choose the right frequency of interest payout for your fixed deposit, based on your income needs and tax liability. You can opt for monthly, quarterly, half-yearly, or annual interest payout, or reinvest the interest to get a higher maturity amount.

6. What are the tax implications of investing in saving schemes and fixed deposits?

The tax implications of investing in saving schemes and fixed deposits are different, and depend on the type of scheme, the amount invested, the interest earned, and the income tax slab of the investor. Some of the tax implications are:

• The investment, interest, and maturity amount of saving schemes are exempt from tax under various sections of the Income Tax Act, such as Section 80C, Section 80D, Section 10(15), etc. This means that the amount invested, the interest earned, or the maturity amount are either fully or partially exempt from tax, depending on the scheme.
• The interest earned on fixed deposits is taxable as per the income tax slab of the investor. This means that the interest earned is added to the total income of the investor and taxed accordingly. The bank or the financial institution deducts tax deducted at source (TDS) at the rate of 10% on the interest earned, if it exceeds Rs. 40,000 in a financial year. The investor can claim the TDS as a deduction from the tax liability, or claim a refund, if the total income is below the taxable limit.
• There are some tax-saving fixed deposits that offer tax deduction under Section 80C, up to Rs. 1.5 lakh per year. However, these deposits have a lock-in period of 5 years and do not allow premature withdrawal or loan facility. The interest earned on these deposits is also taxable as per the income tax slab of the investor.

7. What are the eligibility criteria and documents required to invest in saving schemes and fixed deposits?

The eligibility criteria and documents required to invest in saving schemes and fixed deposits are different, and depend on the type of scheme, the bank, the post office, or the financial institution that offers these schemes. Some of the eligibility criteria and documents required are:

• To invest in saving schemes, such as PPF, NSC, SSY, etc., one has to be a resident Indian, and have a valid identity proof, such as Aadhaar card, PAN card, passport, voter ID card, etc., and a valid address proof, such as electricity bill, water bill, telephone bill, bank statement, etc. One can open an account with the post office or a designated bank, and fill up the application form, along with the required documents and the initial deposit amount.
• To invest in fixed deposits, such as bank FDs, company FDs, post office FDs, etc., one has to be a resident Indian, a non-resident Indian (NRI), a Hindu undivided family (HUF), a company, a trust, a partnership firm, or any other entity, and have a valid identity proof, such as Aadhaar card, PAN card, passport, voter ID card, etc., and a valid address proof, such as electricity bill, water bill, telephone bill, bank statement, etc. One can open an account with the bank, the company, the post office, or the financial institution, and fill up the application form, along with the required documents and the deposit amount.

8. What are the penalty charges and risk factors of investing in fixed deposits?

Investing in fixed deposits involves some penalty charges and risk factors that one should be aware of. Some of the penalty charges and risk factors are:

• Penalty charges: If one withdraws the money before the maturity date from fixed deposits, one has to pay some penalty charges, which can vary from 0.5% to 1% of the deposit amount. This can reduce the returns and affect the income. However, some banks or financial institutions may waive off the penalty charges in some cases, such as death of the depositor, medical emergency, etc.
• Risk factors: Fixed deposits are not backed by the government and depend on the credibility and stability of the bank or the financial institution that offers them. There is a risk of default or loss of money in case of bankruptcy or insolvency of the bank or the financial institution. The deposit insurance scheme covers only up to Rs. 5 lakh per depositor per bank.