The current generation is fast-paced. There are a lot of new inventions and products in the market across all sectors. It may seem that traditional products are of no value in today’s world. But, this is not all true! The value of a few things does not fade away with time. One such product is a fixed deposit (FD) account.
Millennials may consider FDs to be an old-fashioned investment instrument. Here are five reasons why FDs can never go out-of-trend.
1. Fixed and Secured Returns
A fixed deposit account offers fixed and secured returns, which is unlike a market-linked instrument. The interest rate offered by the bank/post office FDs is higher than a savings bank account. In the case of long-term FDs, the power of compounding can beat inflation.
You never know how tomorrow may turn out. In case your bank goes bankrupt due to internal issues, you don’t have to worry about losing your hard-earned money. Deposit Insurance and Credit Guarantee Corporation (DICGC) provides insurance to each depositor in a bank on the money deposited in an FD account. Deposit and interest of up to a sum of Rs.5 lakh per account holder per bank will be returned to you by DICGC.
FDs can be thought of as an ideal investment choice when it comes to liquidity. There are several forms of liquidity available under FDs. They are:
- You can choose a monthly or quarterly interest payout option. Mostly, senior citizens choose this option so the payout can act as a source of income. On the other hand, if you don’t choose the payout option, the interest accumulated can be reinvested into the account and be treated as a part of the principal.
- Flexi FD schemes are offered by many major banks, which is linked to the savings account. The account comes with auto-transfer of money in units of, say, Rs.5,000 whenever the savings account balance exceeds Rs.25,000. This amount will be reverse-swept when the balance in the savings account falls below Rs.25,000.
- If you are in an emergency, you can prematurely withdraw the funds from your FD account.
3. Short-Term Goals
You can utilise FDs to plan and fulfil your short-term goals, the ones that are a few months to a couple of years away. You can also choose FDs to build an emergency fund as FDs are the safe haven to park the money you have earned. In addition to securing the capital you have deposited in the FD account, you can also earn an interest component on the capital.
Say you are planning to save enough money to pay for the down payment on an SUV in the next 12 months, and you have been saving up small amounts every month. Your employer pays you a bonus appreciating your work. This can reduce the time required for you to reach your goal. You can set aside the bonus payment you have received in an FD account and let it earn interest on its own for a tenure of five months, i.e. the time remaining to fix the down payment. The bonus residing in the FD account can speed up the date of your dream car coming home.
4. Loan Against FD
You never know when your job or health can fall at risk. This is especially true during this whole COVID-19 episodes happening around us. If ever you happen to have a dire need of money, an FD account you have opened when everything’s fine can come in handy.
As an alternative to making a premature or partial withdrawal on your FD account, you can take a loan against the FD account balance. This will be a secured loan as the loan is provided based on the FD account balance. The interest rate for such a loan will be 2% above the FD interest rate. Also, the interest is charged on the amount utilised and the tenure of utilisation.
The loan can be repaid as long as the FD account is in force. Making a prepayment will not attract any kind of charges. Most banks provide the loan in the form of an overdraft facility provided along with a cheque book.
5. Tax Benefits
Bank and post office branches provide the five-year FD account that offers income tax benefits under Section 80C of the Income Tax Act, 1961. Resident individuals and Hindu Undivided Families (HUFs) can get the tax benefit by investing in a five-year FD, also popularly known as Tax Saver FD.
Though the account can be jointly opened, only the primary account holder can claim the tax benefit. The minimum sum you need to open a Tax Saver FD is Rs.100 and can go up to Rs.1.5 lakh per financial year. The account comes with a lock-in period of five years. Since the interest accumulated will be reinvested in the account, the power of compounding can be seen through the returns from this account.
Under Section 197A of the Income Tax Act, you can request the bank not to deduct the tax at source (TDS) by submitting Form 15G and Form 15H, by the general public and senior citizens respectively, if their annual income is within the basic exemption limit, i.e. Rs.2.5 lakh.
Now, you know why FDs are an evergreen option for investors, risk-averse or not, to generate fixed and guaranteed returns. What do you think of the FDs?
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