#015: On Fixed Deposits

How does a Fixed Deposit help during a financial emergency?

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When you plan to invest, asset allocation is important. Asset allocation is a process of dividing your money and investing into equity, bonds and cash instruments based on your risk appetite and time horizon. Fixed deposits may form a key component of your cash asset allocation for ready liquidity and financial emergency.

At the onset of the pandemic, many families faced financial uncertainty as individuals had to face job losses, pay cuts, etc., and were compelled to make lifestyle adjustments to deal with the situation. As India battles the second wave of the pandemic, people may need to dip into their savings to meet unforeseen expenses.

For cautious investors and those new to investing, savings is synonymous with Fixed Deposits (FDs). Though not a new instrument, Fixed Deposit is a popular investment choice especially in India owing to its high safety quotient, especially for those that prefer to invest for the long term.

Five main advantages of having a fixed deposit:

1. Easy to open

Opening a fixed deposit these days is the easiest thing and involves no cumbersome paperwork or processes. With the technological advancements in the banking world, you can open your fixed deposit in a few minutes through a mobile or laptop from the convenience of your home. You can even set your FD amount based on your personal financial goal.

2. Safety

Bank fixed deposits are among the safer investment options available for those apprehensive of market volatility. You also don’t have to worry about interest rate changes since the rate will be fixed for the tenure of the deposit, delivering assured returns to the investor with no fluctuations. The associated risks are relatively low.

This makes FDs a great option for inculcating the habit of savings at an early age since the investor can experiment with amounts and tenures depending on their needs.

3. Tenure options

When it comes to tenure, there are plenty of options available. Banks offer varying interest rates based on the FD tenure. Usually, the longer the tenure, the higher the interest rate on the deposit. Digibank by DBS offers FDs with tenures ranging from 90 days to five years. So depending on your anticipated fund needs at a future date, you must choose an appropriate tenure!

4. Easy withdrawal

FDs come with a certain degree of financial flexibility. If there is an emergency, you can always choose to withdraw the deposit prematurely, which will be credited to your savings account instantly. The bank may sometimes levy little to no penalty charges for premature withdrawals.

5. Deposit insurance

This is another advantage of having a fixed deposit. All bank deposits are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to a limit of ₹5 lakh. So your money is insured up to ₹5 lakh; this applies to each FD you hold and is another safety net associated with FDs. The insurance guarantees protection to all depositor’s money.

A fixed deposit could be your best friend through adversities. Investing in an FD ensures that the money is not spent on frivolous needs, but there is an assurance that it is available in emergencies. Moreover, it’s highly liquid, and if you decide to withdraw before maturity, you can have the cash deposited into your savings account quickly.

But don’t leave out the effects of inflation on your savings when choosing to allocate your money in fixed deposits.

Now that you have all the necessary information on FDs, you can open one without hesitation and realise its potential to the maximum.

That’s it for today dear reader. See you next week.

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