Reasons Why You Should Not Rely on Savings in FDs

Relying on fixed deposits to save money might not always be the best idea. Find out why in this detailed guide!

Fixed deposits are one of the most popular ways to save money, but they might not always be the best option. If you’re considering investing in fixed deposits, take a look at this guide to learn some of the potential disadvantages – from low returns to restrictions on access.

Low Returns

One of the biggest downsides of investing in fixed deposits is the low returns – compared to other investment vehicles, fixed deposits generate much lower interest rates.

This means that you won’t get the highest possible returns on your money, and if inflation keeps rising faster than your return rate, you could actually decrease the value of your savings over time.

Bank FD rates normally keep on changing from time to time. The simple logic is that when bank need funds the interest rates usually tend to increase. Like wise, when bank has sufficient funds already, these rates are low.

Recently most of the banks in India hike the FD rates. A year back in 2021-22, it was hovering at around 5 to 6 percent per annum. Similarly the interest on bank loans also get hiked. Loans get costlier than the last financial year.

Maximum rates can be seen at around 8 percent. Still its far-fetch if one is expecting good returns from his investment. You might get much better returns on other alternative such as mutual funds.

Liquidity With Bank’s Terms & Conditions

Another drawback of investing in fixed deposits is that it does not provide you with the same level of liquidity as other investment vehicles. With FDs, you are often locked into a set interest rate and duration – if you want to cash out before that, there may be hefty fees attached.

This makes it difficult to access your money when you need it, leaving you at the mercy of the bank’s terms and conditions.

Lack of Flexibility

When you choose to invest in a fixed deposit, you’re investing for set period of time and given rate of interest. It means you are stuck with the same terms regardless of how the market behaves.

This makes it hard to adjust and make changes when your financial needs or life circumstances change. For example, if interest rates have declined since the date of your initial investment, you aren’t able to benefit from them.

Additionally, with FDs there may be restrictions on the number of deposits that can be made in a single year.

High Penalty for Early Withdrawals

In addition to restrictions on the number of deposits allowed in a single year, fixed deposits often have very high penalties for early withdrawals. These penalties can be as much as 10-20% of the principal amount of the deposit.

It could get you lose a significant sum depending on how much you’ve invested and when you decide to withdraw it.

For these reasons, relying heavily on fixed deposits as your primary savings vehicle may not be ideal and it’s best to explore other options.

Taxes on Interest Income

Another downside to relying on fixed deposits for your savings is that the interest earned from them is taxable. While you do have the option to apply for tax-free FDs as well, they tend to offer lower returns than normal FDs and may not be ideal if you’re looking to maximize your savings.

Tax-free FD is not a specific product. You have to declare with form 15G/H to exempt from Tax deduction at source. In addition, given the high penalty rates on early withdrawals, it can often be difficult to make use of these tax benefits and can end up costing you more in the long run.