Fixed deposits are one of the first investment options that come into anyone’s mind if they are looking for a safe investment option. A fixed deposit is an investment vehicle, which allows individuals to deposit a lump sum for a fixed period to earn a predetermined rate of interest.
Most financial institutions that are granted with banking rights are allowed to offer fixed deposits in India. Banks are the most preferred financial institutions that individuals prefer when it comes to opening a fixed deposit. These deposits are the best option for risk-averse investors as they get a fixed return, regardless of the market scenario.
However, fixed deposits come with a catch. To earn returns at the predetermined rate, you will have to stay invested over the tenor of the fixed deposit. Premature withdrawals are allowed, but you have to pay the penalty for the same, and it is charged in the form of reduced interest on your deposit.
To earn maximum returns on your investment, you have to stay invested over the fixed tenor, and thereby providing you with lower levels of liquidity. This is where flexi deposits score better. These deposits provide you with the level of liquidity of a regular savings bank account while offering returns as high as that of a fixed deposit.
Flexi deposit accounts come with a predetermined limit after which the excess funds are automatically driven into a fixed deposit. The funds below the threshold are available for the withdrawal at any time and earn interest at the rate of a regular savings account, while the excess funds earn interest at the rate as that of a fixed deposit.
If you need funds that are driven into a fixed deposit, then you can withdraw it. If the withdrawal results in the account balance falling under the predetermined limit, then the account would earn interest as that of a regular savings bank account. This account is suitable for individuals who have surplus funds but transact very often.
A significant advantage of a fixed deposit is that you can avail a secured loan against it. This facility is not available on flexi deposits. If you do not need your sum any time soon and are ready to invest for a longer duration, then fixed deposits are apt. Flexi deposits are advisable if your investment horizon is short and would need your investment sometime soon.
Therefore, flexi deposits should not be considered as an investment option for long-term wealth accumulation. For this, fixed deposits are a more suitable option. Flexi deposits should instead be considered as an option to park your surplus funds to earn a higher rate of return as compared to a regular savings bank account.
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Engineer by qualification, financial writer by choice. I am always open to learning new things.