When securing your financial future, navigating the diverse options can feel overwhelming. Fixed deposits (FDs) offer a compelling avenue for guaranteed returns, but choosing the right type requires careful research and consideration. This article delves into the crucial distinctions between fixed deposits short term and long term, empowering you to make an informed decision aligned with your unique financial goals.
Whether you seek readily accessible funds for near-term needs or aspire towards long-term wealth creation, understanding the nuances of each FD type is essential. We’ll dissect the critical factors such as investment horizons, interest rates, liquidity options, and potential risks associated with each.
By examining these crucial aspects, you’ll gain the knowledge to confidently navigate the world of FDs and select the option that best complements your financial roadmap. Whether you prioritise immediate accessibility or aspire to build long-term wealth, this comprehensive guide will equip you with the tools to make informed decisions and unlock the full potential of FDs.
What Is a Short-Term Fixed Deposit?
Short-term fixed deposits (FDs) are deposit accounts where you can hold your money for 7 days to up to 2 years. They are perfect for short-term goals as they earn guaranteed interest rates higher than a regular savings account and can be withdrawn early.
Features and Benefits of Short-Term Fixed Deposit
The following are some of the key features of short-term fixed deposits:
- Tenure ranges between 7 days to 2 years.
- The minimum amount of deposit varies from organisation to organisation.
- The returns are fixed and do not get influenced by market forces.
- Returns from these deposits are also taxable.
- It is useful for short-term purposes.
- There may be issues in short-term liquidity for these deposits.
- Moreover, you have to reinvest the money earlier, due to lower tenure. The rates offered at the time may not be the same.
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What Is a Long-Term Fixed Deposit?
Long-term fixed deposits (FDs) differ from standard FDs by locking your money for a longer period, typically 5-10 years. While offering similar security and ease of creation, they boast two key advantages: increased liquidity through options like partial withdrawals and potentially higher returns thanks to longer investment horizons. This makes them perfect for securing long-term financial goals without the volatility of market-linked investments.
Features and Benefits of Long-Term Fixed Deposit
The following are some of the key features of a long-term fixed deposit:
- Maturity terms range from 5 to 10 years.
- Long-term FDs often come with the option of automatic renewal, ensuring your investment continues to accumulate interest without interruption.
- While primarily designed for long-term goals, FDs of 5 years or more sometimes offer liquidity in case of unexpected needs. This provides a financial safety net for unforeseen circumstances.
- Interest rates offered by long-term FDs typically range from 6% to 7%, which is often higher than the rates offered by short term FDs. Long-term FDs also involve a higher number of times the money is compounded. The resulting attractive returns help you reach your financial aspirations faster.
- Unlike market-linked investments, long-term FDs offer guaranteed returns at maturity. This assurance eliminates uncertainty and provides peace of mind, knowing your investment will steadily grow as planned.
Short-Term FD vs Long-Term FD
The following are some of the differences between short term and long term FDs:
| Factors | Short-Term Fixed Deposits (FDs) | Long-Term Fixed Deposits (FDs) |
| Investment Period | Generally spans 7 days to 91 days | Extends from over 12 months to 10 years |
| Interest Rates | Usually lower in comparison to long-term FDs | Higher, offering better returns over time |
| Liquidity | Provides quick access to funds | Limited due to longer lock-in periods |
| Reinvestment Risk | May need to reinvest at potentially lower rates | Fixed interest rate for the full duration |
| Wealth Accumulation | Limited contribution to long-term growth | Offers potential for significant wealth growth |
| Opportunity Cost | Lower, as funds can be reinvested quickly | Higher, due to the longer lock-in period |
| Flexibility | More adaptable to market changes | Less flexible, with potential penalties for early withdrawal |
| Goal Alignment | Ideal for short-term goals and immediate needs | Suitable for long-term objectives like education or retirement |
| Risk Tolerance | Lower risk, given shorter duration and flexibility | Moderate risk, due to extended lock-in and fixed rates |
Savings TDS on FD Interest Rate
You should spread out your investment in multiple fixed deposit accounts. This is because, even though interest earned from fixed deposits is taxable, you do not have to pay any tax as long as the interest earned in a year from a single fixed deposit in a branch is less than ₹40,000. Therefore, if you keep only that much money in a single fixed deposit account that can earn interest less than ₹40,000 interest, then you can save on taxes.
Using Short-Term and Long-Term Fixed Deposits to Build a Good Financial Plan
When navigating the investment landscape, carefully evaluating several key factors is paramount to selecting the appropriate fixed deposit (FD).
1. Risk Tolerance:
Short-term FDs generally exhibit lower exposure to market fluctuations compared to their long-term counterparts. This characteristic may align better with investors prioritising minimal risk and rapid liquidity access.
2. Financial Goals:
Harmonise the FD’s tenure with your specific financial objectives. Short-term FDs can be more suitable for near-term aspirations like travel or acquiring smaller items. Conversely, long-term FDs offer stability for long-range goals such as education funding or property acquisition.
3. Interest Rate Environment:
Analyse prevailing FD interest rates and the broader economic outlook. Anticipated increases in rates may incentivise locking into a long-term deposit. Conversely, if rates are currently high, opting for short-term FDs may provide lucrative reinvestment opportunities in the future.
Final Words
Now that you know about risk-free investments like short term and long term fixed deposits, try finding out more about investments that add to not only your risks but also your returns, like the stock market. Open a free demat account with Angel One if you are ready to start investing!
FAQs
Which is better: Short-term or long-term FDs?
It depends! Consider your goals, risk tolerance, and desired access to funds. Short-term FDs offer quick access and lower risk, but lower returns. Long-term FDs provide higher returns and guaranteed maturity but lock your money for longer and may have penalties for early withdrawals.
What are the typical interest rates for each type of FD?
Generally, long-term FDs offer higher interest rates (6-7%) than short-term ones (lower than 6%). However, rates can vary depending on institutions, current market conditions, and chosen tenure.
Can I withdraw money early from either type of FD?
Yes, but early withdrawals often incur penalties that reduce your overall returns. This penalty can vary depending on the institution and chosen FD type.
How do taxes affect my FD returns?
Interest earned from FDs above ₹40,000 per year per bank is taxable. Spreading your FDs across multiple accounts with amounts below this limit can help minimise tax implications.
How can I use FDs to achieve my financial goals?
Both short-term and long-term FDs can be valuable tools. Match the FD tenure to your goals: short-term for immediate needs, long-term for future aspirations. Consider your risk tolerance and interest rates to make the best choice.