Is it worth investing in FDs anymore?

Fixed deposits have been among the most sought-after investment options for a large portion of the population across the country. But, in the current financial scenario, where the interest rates are low, is it worth investing in an FD anymore?

Is it worth investing in FDs anymore

Fixed deposits have been among the most sought-after investment options for a large portion of the population across the country. They can be used as the sole weapon of a risk-averse investor's portfolio or as a component in a portfolio balanced by the risk-averse investor most of the time, and fixed deposits are found to be a secure refuge and a default option. This is because of their dual benefits of capital security.

With the economy experiencing a falling interest rate over the past several years or so, the interest rates for Bank FDs have slowed and remain at a low level. It's normal to ask yourself whether it is a good idea to invest in an FD now? In the current market, with stocks climbing to new heights and the growing awareness of the enormous potential of mutual funds, investors are looking in the opposite direction.


What are the advantages of using bank FDs?

1.Five lakhs insurance coverage under DICGC

The DICGC (Deposit Insurance and Credit Guarantee Corporation) is an affiliate of the RBI that provides deposit insurance for deposits opened through scheduled banks. The cumulative bank deposits that include the fixed deposit, savings accounts, regular deposits, recurring deposits, and current accounts are covered up to 5 lakh for each bank and depositor in the event a bank fails. In addition, both the principal and interest part of FDs and deposits in current and savings accounts are covered under DICGC.


 2. Get credit score improvement by leveraging the FD

FD customers who are brand new in the world of credit, i.e. don't have any credit history and therefore do not have a credit score, can leverage their FDs to get secure credit cards. These cards are offered as the collateral of the FD, and the depositor continues earning interest from the account used as collateral. Secured credit cards are particularly useful for people having difficulties with regular credit card applications because of no or poor credit scores, insufficient income, non-serviceable area, employer's profile or work profile.

 3. Credit against FD without losing the interest

Nearly all banks that offer FD offer the option of lending against FD and in the type of an overdraft. In this case, the credit limit is granted to the borrower on how much FD secured as collateral and interest are charged only on the amount drawn and repaid until it is made. But don't fret; the pledged FD will continue to earn interest throughout the loan. Furthermore, borrowing against FD helps you cover the financial burden without the need to close the FD before the deadline and incur fees for prepayment.


Why are people shifting away from FDs

The main reason for the decrease in FD investments is increased mutual fund investments. It can be explained by the fact that they do not only provide a solution to investors with different risks and the investment goals of investors, however, but their returns also typically surpass the less than the optimal return of instruments with fixed interest such as Bank FD as well as PPF by a good margin, particularly over the long run after adjusting for variables like inflation and taxation.

Also, other reasons include: -

  1. The taxability of FDs as per the tax slab is a hindrance. The interest portion is taxable even for 5 Year FD, which comes under 80C.
  2. Premature withdrawal charges discourage the investors.
  3. Low returns compared to other PPF, debt mutual funds and equity mutual funds.


Although the returns of FD are lower, it is an asset class with the least amount of risk. Equity mutual funds have market risk, and debt mutual funds have default risk. FDs being insured are the least products in the market, and if you are risk-averse, you should consider investing in FDs.


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