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Why an FD is better than a market-linked investment

Why an FD is better than a market-linked investment

We present a few reasons why you should consider parking your surplus funds in a fixed deposit account rather than make a market-linked investment.

Every person wishes to make smart investments that carry zero risk and maximum returns. At the outset, it is important to note that every investment carries an element of risk. But some, like fixed deposits, have the lowest risk propensity and also offer guaranteed returns.

Though most people believe that market-linked investments offer higher returns over a longer period, they do not cushion you against risk. Hence, novice and conservative investors would be better served by parking their surplus funds in a fixed deposit rather than invest it in shares or stocks – here’s why:

* It does not spring any surprises. The single most important benefit of the fixed deposit is that you can predict the eventual capital appreciation on it. You can use an online fixed deposit calculator and input the investment amount, the fixed deposit interest rate and the tenure of the deposit, to find out how much the appreciation will be. You can be certain that the investment will grow to this sum of money, which you cannot guarantee with a market-linked instrument.

* Its interest rate remains constant despite market movements. The reason why a fixed deposit grows with a guaranteed graph, is that the fixed deposit interest rate remains unchanged throughout the deposit tenure. This is in direct contrast to market-linked investments, whose growth depends on the interest rates and NAVs (Net Asset Values). The fixed deposit interest rate remains unchanged from the period of vesting to maturity, notwithstanding changes in market rates. So the growth of the deposit is guaranteed.

* You can time it to coincide with an important milestone. Since you are aware of how much the fixed deposit will grow in a certain time period, you can use it to accomplish an important goal. For instance, you might want to buy a bigger car after five years, and you may need a certain sum of money for the down payment. Hence, if you invest Rs 5 lakh today for a period of at least five years in a tax saving FD, you can cobble together the finances to make a down payment. The point is, the fixed deposit gives you the flexibility to time the tenure and corpus growth as per a future milestone – you cannot reliably do this with a market-linked investment.

* It never fails, unless the lender shuts down operations. Several market-linked investments fail because their risk profile is too high, or they do not grow as per anticipated rates. At other times, the investment scheme may be summarily discontinued if it does not show any prospects for growth or further profit. However, no such fears exist with a fixed deposit. There is no danger of the fixed deposit closing down or not showing growth, unless the bank or financial institution shuts operations – and this rarely happens.

Leading banks and housing finance companies in India offer good fixed deposit interest rates that help your investment grow. Senior citizens get 0.5% interest rate higher than others.

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