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Is it Beneficial to Invest in a Fixed Deposit? Pros and Cons of FD Investment

Would you rather keep your money idle or invest it to earn some returns? The answer is obvious. Since childhood, Indian parents teach their children the importance of money, savings, and investments. The most popular form of investment in India is Fixed Deposit. As per a survey report published by SEBI in August 2019, 95% of Indian households preferred to make a fixed deposit investment in rural as well as urban areas combined. 

While there are numerous investment options on the market, including recurring deposits, PPF, stock markets, mutual funds, bonds, commodities, currencies, etc, what makes fixed deposits such a preferred investment option? This blog answers all your questions regarding fixed deposit and what you can expect from an FD investment.

What is a Fixed Deposit?

Fixed Deposits are investments that pay a fixed interest income over an agreed-upon tenure. Fixed Deposits can be issued by Banks as well as NBFCs. Based on your preference, you can choose to either withdraw this interest or reinvest it and enjoy compounding benefits. 


  1. Fixed Deposit: Definition, Advantages, & Working Principle Explained

You can invest in an FD for the short, medium, or long term. Depending on your fund requirements and the purpose of investment, you can select a fixed deposit time period between 7 days to 10 years. Here are the advantages and working principles of a Fixed Deposit.

1.1 Advantages and Benefits of Fixed Deposit

Having learned about a fixed deposit, let’s look at the pros and cons of fixed deposit investments.



1.2 How Does Fixed Deposit Work?

Before investing in a fixed deposit, it is important to understand the mechanism through which FDs work. Here are all the details of how a fixed deposit works.

1.2.1 Choose the Type of Fixed Deposit

You can open a fixed-deposit account with a bank or an NBFC. While you can invest in an FD both online and offline, getting an overdraft on your FD is much easier with online FDs. There are different types of FDs available. But, you should check these points to select the best one for you:

1.2.2 How is the Interest Calculated?

1.2.3 What is the Tenure of a Fixed Deposit?

1.2.4 Auto-sweep-in Facility

What is a fixed-deposit auto-sweep-in? While people think that FDs are only meant for lump sum investments, you can access an auto-sweep-in option for investing regularly. Let’s see how it works:

Date Opening Savings Balance () Amount Received () Total Balance () New Auto-Sweep-in FD () New Savings Balance ()
1st March 2022 30,000 50,000 80,000 30,000 50,000
1st April 2022 50,000 50,000 1,00,000 30,000 70,000


1.2.5 Compound Interest

This is by far one of the major benefits of investing in a fixed deposit. Suppose, you invest an amount of 5,00,000 in an FD from March 2022 for a period of 3 years at 6% p.a. compounded every quarter. Here is the table showing how fixed deposit interest is calculated:

Month Opening Balance () Interest @ 6% p.a. Paid Quarterly () Closing Balance ()
March 2022 5,00,000 NIL 5,00,000
June 2022 5,00,000 7,500 5,07,500
September 2022 5,07,500 7,613 5,15,113
December 2022 5,15,113 7,727 5,22,840
March 2023 5,22,840 7,843 5,30,683
June 2023 5,30,683 7,960 5,38,643
September 2023 5,38,643 8,080 5,43,723
December 2023 5,46,723 8,201 5,54,924
March 2024 5,54,924 8,324 5,63,248
June 2024 5,63,248 8,449 5,71,697
September 2024 5,71,697 8,575 5,80,272
December 2024 5,80,272 8,704 5,88,976
March 2025 5,88,976 8,835 5,97,811
Total Interest & Effective ROI 97,811 6.52% p.a.

The effective return on investment for 3 years on a 6% p.a. FD compounded quarterly is 6.52% p.a. This is due to the additional returns provided by the compounding effect of paying further interest on the accrued interest.

1.2.6 Premature Withdrawal

You can close your FD before the due date if you need funds urgently. Banks and FI deduct almost 0.5-1% of the interest amount as a penalty. But, it allows you to maintain your liquidity.

1.2.7 Overdraft against FD

While most FDs do not have a lock-in period, Tax Saving and Senior-Citizen FDs are locked in for 5 years. And eventually, you are charged a penalty on the entire interest for premature withdrawal. To avoid this, you can apply for an overdraft against your FD, which allows you to use the funds and pay interest only on the amount actually withdrawn.

1.2.8 Fixed-Deposit Rules & Regulations

While all the banking instruments in India are regulated by the RBI, it is important to understand the implications of Income Tax on your interest income:

  1. Types of Fixed Deposits

  1. Top Reasons Why You Need a Fixed Deposit?



4. Fixed Deposit vs Recurring Deposit vs Mutual Fund vs P2P Investments: Understanding the Differences


4.1 What is a Fixed-Deposit Account?

As we have already discussed, a Fixed Deposit or an FD is an investment option provided by banks and NBFCs. It helps the investors grow their money over a fixed period at a rate of interest without being subject to any market risks.  


4.2 What is a Recurring Deposit?

It is an investment instrument offered by banks and allows the investors to make regular deposits and earn interest on the investment. It is the most suitable for salaried people as they can invest a sum every month and earn interest. The rate of interest is fixed and does not change throughout the RD term, offering a safe investment option to the investors. 


4.3 What is a Mutual Fund?

A mutual fund is a financial instrument that pools money from multiple investors to invest in stocks, bonds, and other financial instruments. These funds are managed by professional fund managers that allocate the funds to maximise the returns. Mutual funds are influenced by market fluctuations and involve risk. They can also earn handsome returns to the investors. 


4.4 What is a P2P Investment?

P2P or peer-to-peer investment is a loan given by an individual to another individual. These are direct lending-based investment opportunities that can be accessed through online P2P platforms like LenDenClub. Along with higher returns compared to fixed deposit, a P2P investment provides many benefits to the investors, e.g. P2P investment is not subject to market volatility as mutual fund investment is.


4.5 Recurring Deposit VS Fixed Deposit

While both FD and RD investments provide a fixed interest on your invested capital, there are some points of difference between them.

Particulars Fixed Deposit Recurring Deposit
Time of deposit The investor has to invest a lump sum amount and make a one-time payment The investor can divide their investments throughout the RD term, and invest a particular sum at regular intervals and earn interests
Who can open A Fixed Deposit can be opened by anyone who has an active bank account. FD can be opened with a bank, an NBFC, or any other financial institution A recurring deposit can be opened by anyone who has a regular source of income. For example, salaried employees
Tenure An FD tenure can range from anywhere between 7 days to 10 years The minimum tenure of an RD is 6 months and can go up to 10 years
Returns The interest earned on an FD is higher than the interest earned on an RD. This is so because all the amount is deposited at once, and the interest is earned accordingly The interest earned on an RD is lower than the interest earned on an FD


4.6 Fixed Deposit vs Mutual Fund

While fixed deposits are debt-based investment instruments, mutual funds invest in either debt or equity or both. Here are the key differences between these two investment options:

Particulars Mutual Fund Fixed Deposit
Risk Mutual fund is risky as it is affected by market fluctuations, and any change in the stock market dynamics affects the returns on mutual-fund investments Fixed deposit is a safer option as it is not subject to market volatility
Potential Returns The return on a mutual fund depends on the performance of the stocks in which the amount is invested. The return from a mutual fund is not Fixed deposit provides a fixed return over a fixed period of time. The return is in an FD
Investor protection Mutual funds are regulated by the SEBI FDs are regulated by the RBI
Expenses Mutual funds carry some charges like fund-operating expenses FDs do not carry any charges or expenses
Withdrawal Investors can make free-of-cost withdrawals from the mutual funds after the lock-in period. However, withdrawal within the lock-in period costs 1% of the deposit amount Withdrawing within the tenure of the FD requires the investors to break the FD and pay a penalty


5.How Can LenDenClub Provide an Alternative Investment Option?

While a fixed deposit is a safer investment option, it doesn’t provide adequate returns to the investors. With the prevailing FD interest, you can hardly beat the inflation.  On the other hand, stock markets are highly volatile and can lead to capital erosion. Hence, an alternative investment that provides and high returns is a great option. By investing in the LenDenClub P2P lending platform, you can get the following benefits:

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