For every individual, whether salaried or self employed, saving money proves to be an essential part of one’s life. Saving money is easier said than done. Every individual aims to save a certain amount of money but end up spending it all. This could lead to several problems in long run when you will be required to spend on an emergency situation. It is always a smart decision to save money rather than spending less. So, you should always prefer to save money and manage other expenses to be ready for any emergency situation that may arise in the future. Also, it is always advisable to begin saving money from an early stage and make as less debts as possible.
To start saving money, the thumb rule is to make a budget and try to stick to it. Once you have surplus funds with you, you should invest them rather than parking them in your savings account. It will help you to earn more interest on your funds. You can consider mutual funds, stock market and other such investment options. But, all these investments have high risk involved. Fixed Deposits on the other hand will earn you return on your funds with no risk involved at all.
What is a Fixed Deposit?
Fixed Deposit is a type of term deposit which is considered to be one of the safest investment options available. It is offered mostly by all the banks and financial institutions and ranges from 7 days to 10 years. You can get high interest rates on FD than a regular savings account and your interest will be credited on a monthly, quarterly or annual basis. You will be required to invest your desirable investment amount in one go. If you desire to withdraw funds before maturity, Banks and financial institutions can charge a premature withdrawal penalty on your fixed deposit.
Reasons for investing in a Fixed Deposit
Fixed Deposit is considered to be one of the safest investment options available. You have to invest a certain amount of money for a specified period of time. FD interest rates vary depending on your deposit tenure and amount. FD interest is paid out in two ways: One is cumulative deposits, in which the interest is calculated quarterly or annually but is paid out at the end of the tenure. In non-cumulative deposits, the fixed deposit interest is calculated annually, quarterly or at a discounted monthly rate. You can get the best FD rates on your funds and the interest will be paid out monthly, quarterly or annually.
You can buy land or invest in growth schemes like mutual funds and stock market to earn higher returns on your investments. But, these investments always have risk involved. With fixed deposit, you can earn high interest rate on your investments with no risk involved. Following are some of the other reasons for investing in a fixed deposit:
- Insurance of deposits up to Rs.1 lakhs
If you invest in a fixed deposit, you will be offered an insurance of Rs 1 lakhs of the amount that they invest in a fixed deposit. If you want to invest huge amount in a fixed deposit, you can do the same by splitting up into FDs with smaller amounts and avail the insurance for every deposit.
- You can close FDs before maturity
Fixed deposit enables you to earn higher rate of interest than a regular savings account as banks use your funds as part of their cash flow. If you want to withdraw the amount before the agreed maturity period, banks will charge you a penalty on your fixed deposit. The principal amount will remain unaffected, but your bank will deduct on the decided FD interest rate.
In case of an emergency, you can opt to close your fixed deposit before maturity or fulfill your requirement by availing a loan against FD. You can avail a loan against your fixed deposit at a lower rate of interest as the bank has your fixed deposit as collateral.
- Tax saving Fixed Deposits
As per Income Tax Act, 1961 interest earning on your fixed deposit is exempted up to Rs 10000. But, if you want to invest your funds for a longer tenure and do not want to end up paying taxes, you can choose to invest in a tax saving fixed deposit. In a tax saver FD, the principal amount you opt to invest is exempted from taxation. Under these fixed deposits, your money is locked in for a period of 5 years. Also, you will not be able to break your fixed deposit before maturity and cannot avail loans or credit cards on these deposits as well.
- Preferential interest rates for Senior Citizen
Banks and financial institutions offer preferential FD interest rates for senior citizens. Senior citizens are offered higher interest rates on FD than regular individuals. Usually, banks and financial institutions provide 0.50% more than the bank FD rates for regular individuals. But, fixed deposit interest rate for senior citizens varies from one bank to another.
- Loan against Fixed Deposits
This is one of the most important benefits of holding a fixed deposit. Any individual investing in fixed deposit can easily get a loan against FD. Your bank or financial institution will issue a loan against your term deposit using it as collateral. Also, interest rate for the loan taken against your fixed deposit will be much less than traditional loans.
How do you save money by investing in fixed deposit?
Investing your surplus funds not only help you get returns, but also assist you in saving your money.
- Fixed Deposit helps you to save money for a longer tenure as it does not allow you to withdraw your money before maturity
- With FD, you can get a higher rate of interest than a regular savings account
- You can also avail a loan against your fixed deposit up to 70-90% amount of your fixed deposit
- You will get FD interest at maturity, monthly, quarterly or annually
- Against your fixed deposits, you can also get a credit card from the bank as most of the banks and financial institutions provide credit against 70-90% of the FD amount
- The interest earned below Rs.10,000 comes with no tax obligations
- Fixed deposits up to Rs.1.5 lakhs for 5 years are eligible for tax deductions under Section 80C of the Income Tax Act, 1961
Banks and financial institutions do allow you to withdraw money before maturity, but premature withdrawals attract penalty. So, you can save a lot of money by opening a fixed deposit and keeping it till the maturity date.