Fixed deposit is not just about advantages, It too has some pitfalls
Last Updated : June 17, 2016, 7:18 a.m.
Most of us believe that fixed deposit interest rates are higher and it is a secured and the best mode of investment to save your money. It offers you assured returns becasue of higher interest rates on your investments and at the same time it gives you tax benefits. The main objective of making investment in this instrument is to earn more returns and saving the tax as well. Fixed deposits are available for different terms with various features. Banks make changes in fixed deposits to attract more customers to investment in this useful tool. It offers higher interest, available for different terms and at the same time it offers tax benefits, all this sounds really nice and comforting with the view of saving. But, there are always two sides of a coin and you should not forget that all things are not good for everyone. It may be that fixed deposit will not suit your investment requirements and purpose. There are some disadvantages linked with your fixed deposit . Let’s analyse them deeply to understand the investment tool better.
No flexibility to access your funds: In fixed deposit your money is blocked with the bank for tenure you have opted. It might be for months and for years depending upon your interest and saving goals. By investing your money in fixed deposit you loose the flexibility of regular, day-to-day savings account.
If you want to withdraw your money from your fixed deposit amount before the maturity period, you will loose the actual interest what you were supposed to get on your invested money, moreover, you will pay penalty on it. The bank will reduce one percent of interest as penalty from the actual rate of interest of fixed deposit .
Lower investment returns: Fixed deposit almost pay a higher interest than a regular day-to-day saving account. However, because fixed deposit are very low risk investments, they offer you lower return as compare to mutual funds, shares, bonds and real estate. Besides, fixed deposits provide you maximum protection against uncertainty, they offer poor protection against inflation.
Tax exemptions: If you have fixed your money in long-term fixed deposit to avail tax benefits, but if you withdraw your money from your fixed deposit before the maturity period you will loose tax benefits on your fixed amount. Moreover, you will even pay penalty on the overall amount interest.
Tenure of fixed deposit: This is another biggest drawback of fixed deposit. As the tenure of the fixed deposit is pre-fixed and you can’t make any changes in the tenure once you select it. Besides, the interest rates are fixed with the whole tenure you have opted. So, if there is any increase in the interest rates, you will not get that benefit of higher interest rate as your interest rate of fixed deposit is also fixed with the tenure.
Deductions on interest earned: If you have invested your money in fixed deposit to save your tax then you will not get the desired returns, which you were looking forward. But, the bank deduct tax on the amount you earned as interest. If you are into the tax bracket of 20% or 30% and you invested money to save the tax, but it will not solve your purpose as the bank will also deduct TDS on your interest as per your tax bracket. So, here your overall earning will have reduced to normal interest rates and your purpose of saving the money to get higher returns will be wasted.