5 Reasons Why Fixed Deposits Will Never Run Out Of Fashion

6 minsSeptember 10th, 2018

We live in a smart age where smartphones, smartwatches, smart TVs, smart almost everything is surrounding us and has become an essential part of our living. Being fashionable and staying up-to-date is what everyone is in quest of.

Even when it comes to investing, individuals are making an attempt to play it smart as they aspire to create wealth. Now while that may be good, you cannot ignore investing in bank fixed deposits (FDs) or consider them to be unfashionable ––they will never be. Here’s why…

  • Offers fixed and secured returns
    • A bank FD, unlike market-linked instruments, offers fixed and secured returns.
    • Moreover, the rate of interest earned on a bank FD is higher than a savings bank account. The return earned on a bank FD can counter inflation with the effect of power of compounding in the long run.
    • But when you book a bank FD, make sure you do not get swayed by an abnormally high FD Interest Rate; otherwise, you would risk your capital. Remember, with higher returns comes high risk.
  • Can address your liquidity needs
    • Further, you have plans/options such as quarterly compounding (i.e. reinvestment of interest option), quarterly and monthly pay-outs of interest, for you to choose. If you would like to draw a regular source of income, then consider between monthly or quarterly interest pay-outs directly to your bank account. On the other hand, if you aren’t seeking a regular pay-out during the investment tenure, a cumulative method, i.e. the reinvestment option, would be best suited.
    • If you aren’t sure about the tenure, a flexi fixed deposit can be useful.
    • Axis Bank’s Encash 24 Flexi Deposit can be linked to your Axis Bank savings account facilitating automatic transfers in multiples of Rs 5,000 to a fixed deposit when the balance in the savings account crosses Rs 25,000.
    • And the money in fixed deposit can be accessed easily via a cheque or ATM withdrawals. This amount is automatically reverse-swept from the most recently formed FD (in units of Rs 5,000) to your savings account whenever the balance in the latter (i.e. savings account) falls below Rs 25,000.
    • Thus, flexi deposit offers dual benefits:
      • Takes care of liquidity needs; and
      • Earns a high rate of interest via bank FD
    • Besides, when you are in dire need of funds, you have the option to prematurely withdraw the money before maturity subject to a penalty (0.5% to 1.0% lower interest than the contracted rate) and other terms & conditions.
    • However, for certain variant of bank FDs, premature withdrawals are not permitted. For instance, in Axis Bank’s Fixed Deposit Plus premature withdrawal are usually not permitted.
  • Can address your short-term goals and contingency requirements
    • When you have goals that are, say, few months to a couple of years away, or you are building a corpus for a rainy day (also known as contingency fund), a bank FD is one of the safe ways to park your hard-earned money as opposed to taking a risk with market-linked instruments. You will earn a fixed interest on this money parked for the short-term depending on the tenure you choose. Here too, you may consider a flexi fixed deposit.
    • If you aren’t sure about the tenure, a flexi fixed deposit can be useful.
  • Can help you get a loan against your bank FD
    • During exigencies (loss of job, medical emergency, etc.) if you are in dire need of money, but do not wish to liquidate your bank FD, you can avail of a loan against your bank fixed deposit.
    • A loan against your bank fixed deposit is a secured loan, the collateral being the bank FD. The interest rate for loan against FD is comparatively lower than for personal (unsecured) loans – to be precise, just 2.0% above the interest rate earned on your bank FD. And note that interest is charged on the actual amount utilised and for the tenure of utilisation.
    • There are no EMI or post-dated cheques required as is generally the case with other loans. As long as the bank FD is in force, you have the flexibility to repay the loan during that time period. And the best part is, there are no prepayment charges on early closure.
    • Axis Bank’s loan against fixed deposit facility is for everyone who holds/owns a valid Axis Bank FD. All you need is:
      • Fixed deposit receipts duly discharged in favour of the bank
      • Duly filled and signed application form; and
      • Duly signed agreement
    • The minimum amount of loan forwarded is Rs 25,000, and it comes in the form of an overdraft facility (with a minimum tenure of three months) with a cheque book, ATM card, and internet banking facilities.
  • Can help you in tax planning
    • A tax saver bank FD can help you reduce your tax outgo, as investments in these are eligible for deduction under Section 80C of the Income Tax Act, 1961.
    • Only a resident individual and a Hindu Undivided Family (HUF) are allowed to invest in a tax saver fixed deposit. A tax saver fixed deposit can be held in single or in joint name; but in case of the latter, a deduction under Section 80C of the Income Tax Act, 1961 will be available only to the first holder – who should possess a valid PAN (Permanent Account Number).
    • The minimum amount that one can invest is Rs 100 with an upper limit of Rs 1.50 lakh in a financial year. Note that a Tax Saver Bank FD comes with a lock-in period of 5 years, which in fact is good to compound wealth. The interest rate offered by Axis Bank on a tax saver deposit is currently 6.90% p.a
    • You can choose between reinvestment of interest; and quarterly/monthly pay-out of interest.

To conclude…

A bank fixed deposit occupies an important place in the portfolio, particularly if you are averse to taking risk and looking to build wealth securely and steadily.

Plus, from an asset allocation and diversification standpoint, it is sensible to hold some money in fixed deposits.

At Axis Bank, besides the regular bank FD and Tax Saver Bank FD, there are variants viz. Encash 24 Flexi Deposit, and Fixed Deposit Plus.  Opt for the one that suits you the best while you endeavour to build wealth.  Take a smart decision!

However, when you invest, do assess the post-tax returns you would clock since the interest is taxable under “Income from Other Sources” as per your tax slab.

In case, you have no other income apart from interest income in order to avoid Tax Deduction at Source (TDS), submit a declaration under Section 197A of the Income Tax Act in Form 15-G (for general or non-senior citizens) or Form 15-H (for senior citizens), as applicable.

Open Express FD for your financial security and wellbeing. Investments can be done online, i.e. through internet banking or mobile banking––—from the comfort of your home, office, or wherever you are–––or even by physically visiting the nearest bank branch. And when you book a bank FD, make it a point to have a nominee.

Happy Banking!

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.