Fixed deposit is a financial instrument where a sum of money is deposited with a bank or financial institution for a fixed period of time. In return, the depositor is paid a specified interest rate. Some pros of fixed deposits include high interest rates compared to savings accounts, safety of deposited funds if choosing a reputable institution, and lower risk than investing in stocks. However, fixed deposits also have cons like no protection against inflation, inability to withdraw funds before maturity, taxability of interest income, and risk of not being paid back in case of a financial crisis of the institution. Overall, both pros and cons must be considered based on personal factors and requirements when making savings and investment choices.
FD Pros & Cons - High Rates, Safety But Inflation Risk
1. WHAT IS FIXED DEPOSIT?
FIXED DEPOSIT PROS & CONS
PRESENTED BY:
NARENDRA PRATAP, FINANCIAL ADVISER
2. FIXED DEPOSIT
• Fixed deposit (FD) is a financial instrument where a sum of
money given to a bank, financial institution or company
whereby the receiving entity pays interest at a specified
percentage for the time duration of the deposit. The rate of
interest paid for fixed deposit vary according to amount, period
and from bank to bank. At the end of the time period of the
deposit the amount that is originally given is returned to the
investor.
3. PROS OF FIXED DEPOSIT
• High rates of interest - As is already well-known fixed deposit
accounts and considerably good amount of interest; more than
the interest earned on any other forms of savings accounts.
4. PROS OF FIXED DEPOSIT
• Safety of your future – if you choose the right bank or
company, you can consider your future quite secure. You will
get back the money you put away along with a fat sum of
interest.
5. PROS OF FIXED DEPOSIT
• Lower risk as compared to risk involved in investing in stocks.
When you invest in stocks, there is a chance of you losing the
initial value of the money you invested. Fixed deposits involve a
very low risk of losing your investment.
6. CONS OF FIXED DEPOSITS
• Protection against inflation. The fixed interest rates which are
given on fixed deposits do not give you any protection against
inflation. The cost of living is constantly rising a wiser option
would be to invest in shares of a good company which goes in
rhythm inflation. In the long run, the value of the return on
your investment in a fixed deposit account might be much
lower than what you are likely to get from shares in a company
which beats inflation.
7. CONS OF FIXED DEPOSITS
• One of the biggest drawbacks of having a huge part of your
savings in a fixed deposit account is that you cannot withdraw
funds during the tenure. This, however, will only be a drawback
if there happens to be any emergency that comes up during the
fixed period; an emergency which would require you to break
the deposit.
8. CONS OF FIXED DEPOSITS
• The risk factor. It is very important to be careful in choosing the right
financial institution for saving. In the case of a financial crisis
remember that fixed depositors will be one of the last to be paid off.
The companies which offer a very high rate of interest are usually the
ones which have a higher risk.
9. CONS OF FIXED DEPOSITS
• Income Tax. The interest received on fixed deposits is treated as
income and is taxable. So if you look at it from the investment point
of view, there are a few other options such as mutual funds which
will give you some tax benefits.
10. • As every form of investment has its pros and cons, it is not fair
to claim that one stands to be much better than the other.
There are several personal factors and requirements which
should be taken into consideration while making choices with
your savings and investments. Companies which offer unreal
rates if interest and saving schemes are usually the ones which
involve the highest amount of risk. Be wise when you choose to
invest your hard-earned money.