In this post I will discuss why fixed deposits with commercial banks should form an integral part of your portfolio.
The following are the advantages of Fixed Deposits:
1. The Promise of Fixed Returns.
Fixed deposits come with a promise of fixed returns. Irrespective of whether the stock markets crash or their is a fall in general interest rates, a fixed deposit will continue to earn you a fixed rate of interest throughout the tenure of the instrument.
2. Risk Free Investment.
Fixed deposits are virtually risk free instruments and the safety of your capital is guaranteed.
3. You can avail a Loan against a FD,
All commercial banks will offer you a loan against an existing Fixed Deposit. Since the FD itself acts as a collateral against the loan, the bank charges a relatively low rate of interest on such loans.
Take the case of The State Bank of India as an example. Currently the bank sets the interest rate on loans against FD 1% above the FD rate and loans are sanctioned up to 90% of the Fixed/Time deposit value.
4. No Charges on Opening a Fixed Deposit Account.
Whether you are buying a stock or units of a mutual fund or ULIP, you end up paying some form of brokerage or transaction charges which increases your cost of investments. However, there are absolutely no charges involved with opening a Fixed Deposit account with any of the commercial banks. Therefore, there are no additional cost involved.
5. Flexible Tenure.
Banks offer FD's with tenures ranging between 7 days to 10 years with varying interest rates.
6. Benefits of Compounding.
With FD's, an investor has two options - either to receive interest as a credit to his bank account (on a monthly or quartely basis) or to reinvest the same and secure the benefits of compounding.
Option to Withdraw Money Prematurely
Note that banks provide you with the option to prematurely close your FD account in case of any emergency or sudden need for money. However, some banks might levy a penalty for such premature withdrawal depending upon the original tenure of your FD.
Thanks for your time and happy investing.