Five Benefits of Including Fixed Deposit to Your Investment Portfolio

In a fixed deposit scheme, your money is invested for a fixed tenure wherein it earns specified interest. After completion of this tenure, you can either reinvest your money (which is now available with interest) or withdraw it.

Since fixed deposits are considered low-risk investment options that earn comparatively lower interest, many of you may not want them to be in your investment portfolio. You may be keener to invest in market-linked Mutual Funds, Systematic Investment Plans, etc. However, fixed deposits can be a good choice for you and may come up as a good addition to your investment portfolio, here is how:

Comparison Between

Fixed Deposits, Guaranteed Return Plans & Debt Mutual Fund

Guaranteed Return Plans, Fixed Deposits &
Debt Mutual Fund

Guaranteed Return Plans

Returns Before Tax

7.5% ^(TAX-FREE)

Returns After Tax

7.5%

Guaranteed Returns

Yes

Life Cover

Yes

Tax on Profit

Tax Free*

Risk

No Risk

Still Better than FD’s and Debt Mutual Fund

Fixed Deposits

Returns Before Tax

7% ^(TAXABLE)

Returns After Tax

4.8%

Guaranteed Returns

Yes

Life Cover

No

Tax on Profit

Taxable

Risk

Low Risk

Debt Mutual Fund

Returns Before Tax

8% ^(TAXABLE)

Returns After Tax

5.5%

Guaranteed Returns

No

Life Cover

No

Tax on Profit

Taxable

Risk

High Risk

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*For annual premium upto ₹5 Lacs

Five Benefits of Investing in Fixed Deposit:

Benefit Number One - FD Helps to Reduce the Risk in Investment Portfolio:

The key to creating wealth is the allocation of your assets. There are different asset classes, which are - fixed income instruments, equity, gold, etc. These assets play different roles in your portfolio.

Therefore, while mutual funds provide the growth potential to your money in the form of equities for the long term, products of fixed income such as fixed deposits provide stability as there are guaranteed returns. Any investment portfolio that has the right diversification across all the asset classes even including the FDs ensures that the swing in the investment returns is kept to the lowest so that you have a relaxed investment experience.

Benefit Number Two - Fixed Deposits Are the Best Way to Meet Short-Term Goals:

Short-term goals are the goals that you want to achieve within one to three years. The main objective of an FD is to preserve capital as well as earn a small amount of interest at the same time. In this way, a fixed deposit is the best option to achieve short-term goals.

For example, you want to go for a vacation to a foreign country within two years or you want to give your parents an expensive electronic gadget on their 25^th wedding anniversary, which is next year. So, depositing your money in a fixed deposit scheme for one year (or two to three years as per your goal) is the best choice. Since you have an idea about the cost of the gadget or the amount that you may need for your trip, you can invest by considering the rate of interest.

Benefit Number Three - Fixed Deposit Schemes are The Best for Goals That Cannot Wait:

With a fixed deposit scheme, you get a fixed return for sure upon its maturity. So, if there is a financial goal that cannot wait and for achieving that you require a specific amount within a fixed time frame, then fixed deposits are considered ideal for these investments. Let us say, you require Rs. 1.5 lakhs for school admission of your child after two years.

In this case, you know exactly how much money you want after a certain time. Now, with a fixed deposit investment, you know about the return amount upon maturity at the time of depositing your money. Therefore, you can look into the rate of interest and its tenure and accordingly can deposit your money. This can very easily help you to achieve your aim on time.

Benefit Number Four - Fixed Deposits Offer Guaranteed Returns Upon Maturity:

When investing your money in a fixed deposit scheme, you are aware of the amount that you will get as a return when the FD matures. Despite the state of the economy in the country and the current rate of interest of FD, you will get the same interest rate throughout the tenure of your FD scheme as agreed upon at the time of its purchase. This helps you to plan your spending accordingly as you know you will get the highest interest rates and how much money will come to your account after a specific tenure.

Benefit Number Five - Enjoy the Power of Compounding:

If you start investing in fixed deposits at the early stage of your career, you will be able to multiply your wealth easily because of the power of compounding. In a cumulative fixed deposit scheme, the compounded interest earned on the fixed deposit is reinvested with the principal amount.

A cumulative fixed deposit scheme is good for you when you do not want regular payment of the interest as the interest earned on your FD is paid at the time of its maturity. Compounding or cumulative fixed deposits are known as money multipliers. On the contrary, under a non-cumulative FD scheme, the interest is paid at a fixed and regular interval.

Added Advantages:

In addition to the specified five benefits of a fixed deposit scheme, some of the bank FDs offer the highest interest rates and facility of loan against FD, and premature withdrawal. The loan facility can give you easier access to funds when you require them urgently.

The Bottom Line!

It must be clear to you by now that a fixed deposit can be a good addition to your investment portfolio. However, you must remember that a fixed deposit scheme is beneficial for achieving short-term goals. For fulfilling your long-term goals, you can rely upon equities.