Short term or long term fixed deposit: Which FD is best for you?

What is Fixed Deposit?

 

Fixed deposits or term deposits are investment instruments offered by banks or the Non-Banking Financial Companies (NBFCs) that, in simple terms, are registered entities that provide certain financial and investment services but don’t hold a banking license.  In these deposits, your money is deposited with the bank/NBFC for a specific tenure, and you gain a fixed interest. 

 

 

Saving a portion of your earnings is always wise.

 

Oscar Wilde once said, “When I was young, I used to think that money was the most important thing in life. Now that I’m old, I know it is”. 

 

Not everyone has the risk appetite to invest in volatile instruments, like shares and mutual funds. The Indian investor mostly invests in safe options, fixed deposits being a large portion of their investment bucket. 

 

Fixed deposits or term deposits are vital components of anyone’s portfolio, and you would hardly find anyone who doesn’t have FDs in their investment basket. This is because they have proved to be one of the safest investment options. 

 

What are the features of fixed deposits?

 

Here are the significant features of fixed deposits that have made them a popular investment option:

 

• Fixed Returns:

 

You are guaranteed a fixed return while booking a fixed deposit and receive the precise amount on maturity. Even if the other interest rates changes (such as the interest rate on the savings account) during the tenure, your FD will fetch the same agreed return promised while locking in the money. This is certainly not the case with market-related investments, wherein the return depends entirely on market performance; hence they are preferred by conservative investors.

 

• Flexible Tenure:

 

You can choose any tenure from 7 days to 10 years or even higher per your requirements please note that the interest rate differs for every term and increase with tenure.  

 

• Types of returns:

 

You can choose how you want to receive your interest. Be it the quarterly credit, credit on maturity, monthly credit to your account, or reinvestment, you can customize the interest credit as per your usage and requirements. Usually, senior citizens prefer to go for the monthly mode since they run their monthly expenses by the interest received from these FDs.  

 

• Loan against FD:

 

This is another sought-after feature of fixed deposits. In the case of monetary requirements, fixed deposits can function as collateral and help the investor get a loan against it, usually up to 95% of the FD value. 

 

Fixed deposits are of two types depending on their tenure: Long term fixed deposits and short-term fixed deposits.

 

• When we say short-term FDs, we mean those term deposits invested for 7 days to 1 year. The long-term FDs are the ones whose tenure ranges from 1 to 5 or more years. 

 

• When choosing between a Long Term and a Short Term fixed deposit, what matters is your end goal, not FD’s tenure. It’s just that the investment has to meet your requirements. 

 

Let’s dive deeper into the two kinds of fixed deposits and discuss their advantages and disadvantages:

 

Long-term fixed deposits:

Benefits of long-term fixed deposits:

 

• Long-term FDs are your solution to long-term passive income requirements. Even if you don’t require the extra amount right now, you can use them for planning your long-term goals, like your child’s education, purchasing a new home, etc. 

 

• It is a great way to increase your wealth rather than keeping them idle in the savings account. The FDs typically offer a higher interest rate, almost double what a typical saving account offers. Hence, keeping your extra money invested in FD is always advisable rather than keeping it in a savings account. 

 

• You can also invest in Tax Saver FDs while opting for long-term FDs. These tax saver FDs are for 5 to 10 years, wherein your amount is blocked for the said time, and you get a tax benefit under Section 80C of the Income Tax Act, 1961. You have absolutely no option of breaking it between the agreed tenure since you already have availed of 80C benefit on it.

 

• If you have invested in long-term FDs and an emergency arises, you can avail of an easy and hassle-free loan against your FD as collateral. Breaking it prematurely becomes costly since there is a penalty for premature closure. 

 

• Getting a credit card might be a cumbersome process if you are a small business owner or a self-employed person. With long-term FDs as collateral, you can quickly get a credit card as many banks offer credit cards against a fixed deposit.

 

• Similar to loans and credit cards, overdraft facilities can also be availed against FDs since they act as collateral for the overdraft facility. 

 

• It is ideal for senior citizens as they usually do not have any short-time big fund requirements. Instead, their monthly requirement is met by keeping the funds in long-term FDs, earning a high-interest rate, and withdrawing it via MIC (Monthly Interest Credit) mode.

 

 

Short-term fixed deposits:

Benefits of short-term fixed deposits

 

• This kind of investment involves locking your money for a certain period, usually ranging from 7 days up to one year. Thus, it is ideal for short-term fund requirements like buying a device for your home.       

 

• Unlike market-related investments, short-term fixed deposits can be termed one of the safest investments not affected by market forces. Hence, this is an ideal choice for people looking for safe investments. However, when the risk is zero, the return is also moderate. You can’t match the FD returns with risky equity investments yet fetch a good return on investment for a long tenure. 

 

• Leverages the power of compounding at the most current interest rates. The interest rates on FDs keep changing periodically. And whenever you invest in a new FD or an existing FD gets auto renewed, you get the most recent return rate. However, in the case of long-term FD, one interest rate is fixed for the complete tenure and cannot be changed in between. 

 

• You can avail of a loan against them. All banks provide loans to you against the security of your fixed deposits. The short tenure of investment makes it a highly liquid investment that you can withdraw in a short duration yet typically earn interest more than a savings account. 

 

Now the big question: Which fixed deposit is better? Short-term or long-term? 

 

This is a debate that does not have one right answer. Long-term and short-term fixed deposits are an integral part of a balanced investment bucket.

 

If you foresee the interest rates falling, it is wise to lock up your funds for a longer tenure.

 

Although fixed deposits are the most preferred investment among safe investors, they are usually not the best choice owing to their low returns. 

 

With rising inflation, the interest rates are generally bound to increase. Due to rising inflation, money loses its value. To control it, RBI increases the interest rate. In such a case, if we have our money invested in a long-term FD at a lower interest, we would lose out highly. For such cases, it’s better to invest in a short-term FD.

 

Sometimes debt funds are a better option than FDs since many debt mutual funds have historically offered a higher return than most fixed deposits. In such a case, keeping your money in short-term FDs and then transferring it to debt funds as they mature and when you see a good fund can be a prudent strategy. In those ways, you’ll earn the interest of a fixed deposit, which is more than that of a savings account, and also reap the benefits of debt funds. 

 

The correct identification of your funds into long- and short-term FDs is essential. If you’ve invested all of it into long-term FD and suddenly the interest rates increase, you would want to change your tenure, which is impossible. Premature withdrawal of FD is again a costly process that charges a penalty on your return. 

 

Final Word

 

To keep the liquidity intact and maximize returns, you should have both long-term and short-term fixed deposits. In a successful financial plan, both of them has its benefits. 

 

Suppose you wish to earn a corpus in 12 months but don’t want the money to be idle. You can easily invest it in a 12-month FD and earn a good interest rate. This is not possible with a longer duration FD.

 

However, if you anticipate the interest rates falling in the next 4-5 years, investing in a long-term fixed deposit is better.

 

As long as you continue to invest in 12-month short-term fixed deposits every interval and maintain a few long-term fixed deposits that mature in the next 3-5 years, you will accumulate a corpus of funds. You can either spend the fund or reinvest as you deem fit. 

 

How to book an FD on Kuvera?

 

Kuvera allows you to open an FD account for free and earn up to 7.35 % interest. If you choose to invest via Kuvera, you will not need a separate savings account. You can invest in FDs of banks and NBFCs with your primary bank account linked to Kuvera. Here are the simple steps to set up an FD account on Kuvera: 

 

Step 1: Install the Kuvera app or visit our website to sign up.

 

Step 2: Verify your KYC with PAN, Aadhaar, and in-person through video.

 

Step 2: Go to ‘Home’ and select ‘Invest’

 

Step 3: Click on the ‘Fixed Deposit’ option.

 

Step 4: You will see a list of multiple FD options on Kuvera, sorted by tenure, bank, NBFC, etc. Click on any FD to explore its tenure, interest rate, minimum deposit, and lock-in period. 

 

Step 5: Choose the fixed deposit you wish to invest in, and tap ‘Start FD.’

 

Step 6: Enter the IFSC code, account number, and account type of your primary bank account. 

 

 

Frequently Asked Questions

 

• How is the FD renewed?

 

 The deposit will automatically be renewed at the prevalent interest rate if you have instructed the bank to do so. If not, your FD will be automatically terminated, which means the maturity amount will be transferred to your savings account. You will then have to start a new FD.

 

• Can we add money to the existing FD?

 

You cannot add more money to an ongoing (existing) fixed deposit. You can continue to save by investing in a new fixed deposit with a fresh value date.

 

• Is FD taxable on maturity?

 

 Interest income from fixed deposits is fully taxable. It gets added to your total income and taxed at the slab rate applicable to your total income. This amount should be reported under the heading ‘Income from Other Sources’ in your Income Tax Return. However, the principal invested in tax saver FDs is exempt under section 80C.

 

• How is FD interest rate is calculated?

The Returns on the fixed deposit investment are calculated by the interest rate and  interest payouts. The FD interest rates will change periodically.

 

• How to use FD calculator?

FD Calulator helps you to instanly calculate the amount, you will receive at end of the maturity period along with FD interest rate. It also helps you calcualte and compare the interest received at end of the period by changing the tenure period, interest rate and deposit amount.

 

Interested in how we think about the markets?

 

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