By Liam Thomas
Investors with a low-risk appetite invest in FD for assured returns, and those with a high-risk appetite for bringing stability into their diverse portfolios. While fixed deposits are the go-to options for many for good returns and low risk, there’s more to these investment tools! The Indian investment market is filled with banks and NBFCs offering a versatile range of fixed deposits with various FD interest rates, tenures, and payout facilities.
Tenure can play a significant role in determining the overall returns on investment. It is easy to believe the longer the investment stays locked in, the higher returns will be. However, as investors delve deeper into short-term and long-term fixed deposit schemes, multiple other factors will become visible!
Defining Short Term FD and Long-Term FD
The tenures for fixed deposits can be anywhere between 7 days to 10 years. A handful of banks and NBFCs often can offer longer tenures. Short-term FD schemes generally range between 7 days and 2 years. On the other hand, FDs with tenure extending more than 2 years are termed long-term.
5 Tips to Choose Between Short Term and Long-Term Fixed Deposits
Understanding which offers better perks and aligns with respective investment goals is the key to choosing between short-term and long-term fixed deposit schemes. Here are 5 tips to achieve the same!
1. Alignment with Investment Goals
A short-term FD is suitable to fund expenses in the near future. It will offer greater returns and benefits than a regular savings account. However, longer tenures promise higher capital appreciation for expenses to occur in the far future. It is crucial to evaluate the investment goals before selecting the tenure.
2. FD Interest Rates
The FD interest rates vary based on different banks and selected tenures. Banks tend to offer higher rates for longer tenure. A quick research will show you the highest available interest rates in the market. When capital growth is the prime investment goal, picking the highest interest rates is best.
See the table below for an idea of how different tenures can fetch different interest rates!
| Public Sector Banks | Interest Rates (% p.a.) | ||
| Short Term FD / 1-year tenure | Long Term FD / 5-year tenure | Highest slab | |
| Bank of Baroda | 6.85 | 6.50 | 7.25 |
| Bank of India | 6.50 | 6.00 | 7.25 |
| Bank of Maharashtra | 6.50 | 6.00 | 7.00 |
| Canara Bank | 6.85 | 6.70 | 7.25 |
| Central Bank of India | 6.75 | 6.25 | 7.25 |
| Indian Bank | 6.10 | 6.25 | 7.25 |
| Indian Overseas Bank | 6.90 | 6.50 | 7.10 |
| Punjab & Sind Bank | 6.20 | 6.00 | 7.40 |
| Punjab National Bank | 6.75 | 6.50 | 7.05 |
| State Bank of India | 6.80 | 6.50 | 7.10 |
| UCO Bank | 6.50 | 6.20 | 6.50 |
| Union Bank of India | 6.75 | 6.50 | 7.25 |
3. Returns and Inflation
Longer tenure can yield higher returns. However, investors must consider the inflation factor. If the money loses value due to inflation over a long tenure, the final returns, even though higher than a short-term FD, will not be as valuable. Ensure that the interest is greater than the inflation rate; that way, the real returns can stay profitable. Before making long-term investment decisions, it’s advisable to use an FD calculator to assess potential returns based on different interest rates and tenures.
4. Tax Implications
The imposed tax can affect the returns of an FD. It has an even bigger impact on those falling in high tax brackets. Short-term FDs can be a solution to avoid high taxation. The interest accumulation in a short-term FD will be lower, keeping the taxable income low. Furthermore, an FD with a tenure of 5 years or less can fall into the tax-saving FD category. In such a case, investors can claim tax deductions under Section 80C of the 1961 IT Act.
5. Laddering Strategy
Short-term and long-term fixed deposit schemes have several benefits, while one performs better than the other in certain circumstances. The best investment strategy should allow investors to receive the best advantages of both tenures. One such strategy is the FD laddering strategy.
It suggests the diversification of the total principal amount in multiple FD accounts. This way, investors can select both short-term and long-term FD. They can enjoy varying FD interest rates. Furthermore, it will increase liquidity during an emergency. Investors can break off the short-term FD, attracting a lower premature withdrawal charge while the long-term FD remains untouched.
To sum up!
Different fixed deposits have been designed to serve specific investment needs over the years. Investors of all ages and risk appetites can find a suitable FD. More importantly, the numerous FD schemes in the market and their high demand have resulted in competitive rates. Investors must pick from the FD interest rates to ensure maximum returns regardless of the selected type. Make sure the premature withdrawal is agreeable, and features like auto-renewal and nomination are available.
