Why Fixed Deposit is Considered a Safe Investment Option for Beginners?
September 27, 2024
Are you a beginner investor looking for a safe, reliable place to park your hard-earned money? Look no further than Fixed Deposits (FDs)! They are probably the perfect introductory investment vehicle for those who want to dip their toes into the world of investing without taking on too much risk.
In this blog post, we will explore why FDs are an ideal investment option for beginners, how to get started with FDs, and offer tips to maximise returns on fixed deposits.
Brief Introduction to Fixed Deposits
A Fixed Deposit is a type of term deposit where you invest a lump sum amount for a specific period. You earn interest on the amount throughout the tenure. The tenure usually ranges from 7 days to 10 years. The interest is paid out either at maturity or periodically depending on your preference.
For long term FDs, the interest is calculated via the compound interest method. This allows you to earn interest not only on the principal amount but also on the accrued interest, thereby offering higher returns at the time of maturity. However, if you want regular interest pay-outs, there's an option. Non-cumulative FDs offer periodic interest pay-outs - monthly, quarterly or annually.
Talking about premature withdrawal, yes, premature withdrawal is allowed, but only for callable FDs. In simple words, callable FDs are fixed deposits that don't come with any lock-in period. You can withdraw the amount before the actual maturity date. But there's a catch. You pay have to pay a premature withdrawal penalty charge to the bank. You can read more about it here. Just so you know, Ujjivan SFB doesn't charge any premature withdrawal fee for withdrawals made after 6 months from the time of deposit.
Benefits of Fixed Deposits for Beginners
Fixed deposits offer several advantages that make them an ideal investment option for beginners.
- Higher Interest Rates: If you have already started earning, we're assuming that you have a Savings Account. Your Savings Account too earns interest. However, FDs offer higher interest rates compared to Savings Account, facilitating faster wealth growth.
- Convenience: There was a time when to open an FD need you had to visit the bank branch. Of course, lengthy paperwork followed. Thanks to digital banking, now you can open an FD online from the comfort of your home - no paperwork or branch visits required.
- Safety and Stability: FDs are considered one of the safest investment options as they offer guaranteed returns, regardless of market conditions. Even if the market falls, your FD returns would remain unscathed. Your money remains secure, allowing you to build your savings steadily.
- Assured Returns: Unlike other investment avenues that are subject to market risks, FDs provide predictable returns. The fixed deposit interest rate remains constant throughout the tenure, ensuring that your earnings remain consistent.
- Flexibility: FDs offer flexibility in terms of tenures and interest payout options. You can choose a tenure that aligns with your financial goals and opt for periodic interest payouts to meet your financial needs. Non-cumulative FDs allow you to receive interest monthly, quarterly, semi-annually, or annually.
- Save Tax: Tax Saver Fixed Deposits allow you to save tax under Section 80C of the Income Tax Act.
- Overdraft against FD: During financial crunch, you can opt for overdraft against FD. You can withdraw funds as needed based on the overdraft limit. The main benefit of overdraft is that you only pay interest on the amount utilised, thereby making it a cost-effective option compared to personal loans. You can repay the amount as per your wish without any prepayment penalties. However, the repayment should be made before the maturity date.
How to Get Started with Fixed Deposits
Getting started with fixed deposits is extremely simple:
- Select a bank offering competitive FD interest rates
- Decide the amount you want to invest based on your surplus funds
- Select your preferred tenure and interest payout option
- Complete Video KYC with PAN and Aadhar for online FDs or visit the bank branch with relevant KYC documents
- Make payment and start growing your wealth
Tips to Maximise Returns on Fixed Deposits
While FDs offer attractive returns, here are some tips to maximise your earnings:
- Choose the Right Tenure: Select a tenure that aligns with your financial goals. Longer tenures generally offer higher interest rates but may limit liquidity.
- Consider Interest Payout Options: Non-cumulative FDs allow you to receive periodic interest payouts. If you require a regular income stream, opt for monthly or quarterly payouts.
- Utilise the Power of Compounding: Consider reinvesting the interest earned from your FD to benefit from compounding. This allows your money to grow at an accelerated rate over time.
- Ladder Your Investments: Instead of investing all your money in a single FD, consider creating multiple FDs with different tenures. This strategy, known as laddering, helps you maintain liquidity while taking advantage of higher interest rates offered on longer-term deposits.
Final Thoughts
Fixed deposits re an ideal introductory investment option for beginners due to their safety, simplicity, and assured returns. They provide a comfortable starting point to develop a saving habit and earn better returns than a regular savings account. With online account opening and benefits like overdraft facilities and credit cards against fixed deposits, starting your investment journey has never been easier.
To start your introductory investment journey and secure your safe savings, consider opening a fixed deposit account. Visit the Ujjivan SFB website to explore the options available and calculate your potential returns.
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