Why is FD a low-risk investment?

Why is FD a low-risk investment?

Investments are an avenue to utilise saved money in generating extra income

Why is FD a low-risk investment?

Investments are an avenue to utilise saved money in generating extra income. With the market burgeoning with investment options- such as stocks, mutual funds, fixed deposits, bonds, and more; carefully understanding the nature of these investments is necessary to yield maximum returns.   

FD among various investment options

Each investment option has some risk attached to it; the level of risk varies for each investment and accordingly does the return capability. Investment options like stocks and equities could enable you to earn more returns, albeit, with higher risks involving fluctuating stock indices, and market volatilities. The investment made should depend on the risk appetite and the life situation of the investor.  Some investors can take greater risks for potential rewards, while others may prefer the security of stable investments, carrying lower risk. Investors with lower risk appetite can invest in PPFs, bonds, liquid funds, or FDs. While each of these investments has their own benefits, fixed deposits remain to be the go-to investment due to their low-risk nature.

n Assured returns: Since investments made in FDs are unaffected by market fluctuations they fetch assured returns. The investor earns the amount at an interest rate promised at the time of investment. Especially suited for risk-averse investors, FDs are a good choice to park their extra money to earn interest more than that of savings accounts and that too with a guaranteed maturity value. It is highly recommended for conservative investors seeking assured returns to fulfill goals up to five years away.

nHigh interest rates: The time is favourable to invest in fixed deposits as most financiers have hiked their interest rates. As a result, investments now made are not only safe investment- otherwise needed to safeguard the portfolio- but also builds a larger corpus of returns. 

n Flexible tenor: Unlike many other low-risk investments, FDs are flexible in offering the investor to choose the best tenor suited for him/her. In case the investor does not want to lock the investment for a longer tenor, he/she can consider investing in short-term deposits spread across different time intervals. This assures a part of the investment remain liquid for cash needs. 

It is however advisable while choosing a tenor for FDs, to calculate the maturity amount, basis the interest rate offered, using an FD calculator.

n Periodic payouts: Depending on the objectives of the investment one can decide the type of FD to purchase. If the investor wants to access the interest earnings on the investment to fund the recurring needs, investment should be made in a non-cumulative FD. This will enable interest earnings as a regular income all along the tenor. Alternatively, the investor can let the investment accumulate high-interest earnings with time, and access the principal along with the interest on maturity by investing in a cumulative FD.

n Loan against FD facility: Situations may arise when money is required urgently to face emergencies. In such a scenario, without having to liquidate fixed deposits, one can address the emergency by availing a loan against FDs. This way, the investor is prevented from withdrawing their FDs prematurely to lose out on interest or pay any premature withdrawal fees.  

Options for senior citizens 

The current scenario favours senior citizens the most when it comes to investment in FDs. The interest offered in the senior citizen FDs is usually higher compared to the customers of the younger age group. Apart from higher interest rates, it also offers flexible tenure and premature withdrawal. Additionally, the interest earned up to Rs 50,000 in a financial year has become tax-free.

FDs enhance the stability of the portfolio to offset against different risks associated with other investments.

Investors interested in buying FDs should compare the different interest rates offered by banks and NBFCs. Besides, ratings of the institution, while placing the deposit, are an important factor to be considered while deciding the institution. FDs can now be purchased with an easy online process saving the investor from the hassle of the lengthy documentation process and waiting for queues for opening FDs.

(The writer is Business Head and  Corporate Liabilities at Bajaj Finance.)