Parvathi Krishnan
Let's begin with what is a fixed deposit?
Banks attract investors by offering them a higher rate of interest if an amount is kept with them for an assured time. They are termed 'fixed deposits' because the terms of commitments are decided ahead of the investment.
According to investor words, In exchange for not withdrawing the money during the agreed-upon period of time, the bank pays the depositor a larger amount of interest than would be earned from a standard unfixed deposit.
Pros
-The period of investment is fixed and known. You can keep a track of the maturity date to receive this fixed deposit payment.
-Since the amount you invest and the interest earned is fixed, you know the value of the deposit when it matures. Even if the bank reduces its deposit rates, you continue to earn at the assured rate, till maturity. This knowledge keeps surprises at bay, which can be very helpful in planning. You can set aside what you can invest and then you are sure to know what you will get after the fixed deposit term ends.
-Fixed deposits are liquid investments and are easily accessible. There are no hassles about putting in or withdrawing on maturity. Investment is as easy as operating a normal bank account, and on maturity, the amount can be automatically credited to your regular account.
-There are no hidden charges, no brokerage or service charges. What you see is what you get.
-When there are no uncertainties, planning is that much easier.
Cons
-But, fixed deposits do not cover you against inflation. So, the value of your investment does not grow as it should.
-The interest income is taxable in your hands. As a result, the return is lower than the ostensible rate. If you are entitled to a 9 percent rate and you are in the 20 percent slab for taxes, what you get is 7.2 percent return.
-As the rates are fixed, when the bank revises the interest rate upwards, you do not automatically benefit—either you wait till your deposit matures, or you have to foreclose the deposit. If you choose to close the deposit before maturity you have to pay a penalty, which may not be favourable to you.
-In case of any emergency, though withdrawal is permissible, the interest attracts a penalty.
-The principal amount does not grow at a fast enough pace. Because of erosion in value, and as the interest is fixed, to reach a targeted amount, the saving has to be high.
