Is It Worth Investing In Bank Fixed Deposits?

Introduction

For a long time in India, FD or fixed deposit was the default investment for any family with some surplus money. It did not really matter whether the funds were needed immediately or after 10 years. The logic was that the bank FD was the only safe investment. Even within the gamut of fixed deposits, the bank fixed deposits were preferred by most investors.

However, with the advent of equities and mutual funds as mass retail products, the question that arises is, are FDs worth investing in the current Indian context? After all, investing in FD generates lower returns compared to other investments like equities or equity mutual funds in the long run. However, that is like comparing apples and oranges. Bank Fixed deposits have some unique advantages in that they are flexible, adaptable, lucrative and offer a good risk-return trade-off.

Explain Investment in FD

Bank fixed deposits have the advantage of pedigree and of being one of the most familiar products in the market. Fixed deposits are one of the oldest and safest investment instruments, especially when they are provided by scheduled banks. RBI has never allowed scheduled banks to fail, so default risk is almost nil, and even otherwise, there is deposit insurance for up to Rs5 lakhs.

The interest rates on fixed deposits are higher than the interest provided on savings or current account. With the recent spike in repo rates by 220 basis points in the last 6 months, the average yields on bank FDs have also gone up sharply. Let us not forget that it is essential for every investor to diversify their investment portfolio into various types of risky and less risky investments. Bank FDs offer a safe fixed income product with adequate flexibility and attractive yields. Fixed deposits are normally preferred by retired people for regular income. However, professionals and businessmen are also taking a liking for FDs due to their flexibility and simplicity.

Reasons for investing in Fixed Deposits

There are several reasons to invest money in a bank FD and some of the key reasons are enumerated below.

a) Bank FDs are risk-free and guarantee fixed returns. You need some source of stability in a volatile investment scenario.

b) Banks today offer higher fixed deposit interest rates compared to other risk-free investment instruments like Treasury Bills or Government Bonds. The return to risk ratio is very favourable for FDs.

c) Fixed deposits are flexible in more ways than one with regard to tenure of investment. For instance, you can get a fixed deposit that starts from 7 days and goes all the way up to 10 years. The investor can   choose any time-period for investment in fixed deposits. Investors can also choose the best pay-out option for interest like quarterly, half-yearly, annually or cumulative.

d) One argument is that FDs are illiquid, but that is not true. You can break any FD (less than 5 year tenure) by paying a small penalty. Even that can be avoided by opting for loans against FDs or overdraft and sweep facility against fixed deposits. Most of these can be availed online without even going to the bank branch.

e) Most of the products have market risk and this includes equity funds, debt funds, direct equities, gold funds etc. Bank FDs are free of market risk. The rates may be high or low, but either ways you still earn what is committed in the FD document. It avoids the normal uncertainties associated with the vagaries of market movements.

f) There are some special benefits in bank FDs. For example, senior citizens get higher rates of interest on FDs, up to 50 to 60 bps higher for longer tenures. Also, the tax exemption limit for senior citizens is higher in this case. There is also a special Section 80C tax exemption if you opt for a 5 year FD with lock-in. This makes investors eligible for exemption up to Rs150,000 per financial year. Funds are locked in for 5 years.

Should one invest in FD

One must look at FDs in terms of debt allocation. It is a good source of low risk and decent returns. It is also liquid, so don’t have to worry about loss of principal or of monetizing your investments. FD adds stability and reliability to your portfolio.

Advantages of Fixed Deposit Investments

The major advantages of investing in bank FDs are decent returns, low risk, stability of flows, deposit insurance, liquidity and flexibility in structuring the FDs to your choice.

Is it worth investing in FD

FDs are a good source of stability and decent returns at a very low risk to the investor. It is the safety and stability that makes it uniquely important.

Conclusion

FDs are a must in your portfolio. In last few months, the rising repo rates and higher bond yields have made FD rates just that much more attractive.