A Fixed Deposit (FD) is a form of savings with Banks and Non-banking Financial Institutions. FD investment makes a better option as compared to a savings account. The FD interest rates are better, the principal amount is absolutely safe, and you get an assured amount over and above the principal at the end of the term.
Your FD can be long term or short term. A short term FD can be anywhere from 7 days to a year. Long term FDs can, on the other hand, can last up to 10 years and offer the best FD rates in India.
The Basic Difference Between The Two Instruments
If you want to earn from your principal amount, a long-term FD can be an option. When you choose the cumulative option for a longer tenure, your base amount gets compounded over time. This enables you to earn more. However, considering the taxes and inflation, the net earnings from long term FD investment is not substantial.
On the contrary, short-term FDs give you the liberty to ladder your investments. Laddering basically means taking advantage of changing interest rates by renewing your FDs at maturity. At the end of the term, you can check out the best FD rates in India and invest accordingly. You can also have better liquidity through short term FDs apart from increasing interest rates.
More Important Details To Know
Liquidating a long-term FD can attract penalties. Several short-term FDs with different maturity dates are hence better. Since your funds are not locked in for longer durations, your liquidity position is much better.
A short term FD allows you to have transitory savings. It should be your first choice where preserving the capital is the top priority. The Deposit Insurance and Credit Guarantee Corporation (DICGC) has laid down rules that insure up to Rs. 1 lakh of your invested amount.
Splitting your deposits for the short term can offer you better coverage. For instance, say you have a corpus of Rs. 5 lakhs to invest. Splitting this amount and investing across different banks is wise. Besides, the maturity dates can be different, which will also offer you better liquidity. You can also gain from better interest rates that some banks provide on reinvestment on maturity.
How to Choose?
So in a nutshell, if your ultimate aim is wealth creation over the years, long term fixed deposits should not be your first choice. Allocating all your funds to FDs will ultimately erode your wealth away since it isn’t tax-free. Also, the earnings will be set off against the inflation rates.
Short term FDs, on the other hand, such as your emergency funds, kid’s education fund, etc. are the ones that can gain returns for you. With such short term FDs, your principal remains absolutely safe, and you get an assured amount at the end of the tenure.
For long term wealth creation, what you need are investments in different avenues such as high-risk equity funds, moderate risk equity and debt funds, and low-risk funds. A diversified and balanced portfolio is very important when it comes to long term financial planning.