Safe and Steady: Why Fixed Deposits are Ideal for Short-Term Investment Goals

When it comes to short term investments, safety and stability are paramount. You need an investment option that protects your principal while providing steady returns. This is where fixed deposits shine as one of the best short term investment options. Fixed deposits are not only highly secure but also offer the flexibility and liquidity needed for short term investment goals. Let’s explore what makes fixed deposits ideal for parking your funds for the short term.

 

What are Fixed Deposits?

 

A fixed deposit (FD) is a financial instrument. Here, you deposit a lump sum at a predetermined interest rate for a fixed tenure. Unlike regular savings accounts, you cannot withdraw the money from an FD until maturity unless you pay a penalty.

The tenure of an FD can range from 7 days to 10 years. For short term investment plans, you would typically choose an FD with a tenure between 7 days and 12 months. The interest rate remains fixed through the tenure, irrespective of market fluctuations. This makes FDs a predictable and reliable short term investment option.

 

Why are FDs Safe for Short Term Investments?

 

Here are some reasons that make fixed deposits one of the safest short term investment options:

• Guaranteed Returns: With FDs, you earn assured returns as the interest rate is fixed at the time of booking the FD. The rate doesn’t change with market movements.

• Capital Protection: Your principal amount is protected in an FD as it is not exposed to market risks. You will get back the entire invested amount on maturity.

• Deposit Insurance: FDs are booked with scheduled commercial banks, and most NBFCs are insured for up to ₹5 lakh. This is done by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

• Stable Institutions: Banks and NBFCs that offer FDs are well-regulated and supervised by the RBI. This makes them financially stable and secure.

 

Benefits of Short Term Fixed Deposits

In addition to safety, fixed deposits offer several advantages that make them suitable for short term investment goals:

Flexibility in Tenure

 

Short term FDs are available for tenures as low as 7 days, going up to 12 months. You can choose the exact tenure based on when you need the funds. For example, if you’re saving for a car down payment in 6 months, you can open a 6-month FD.

Here’s how different fixed deposit for short term tenures can align with your goals:

 

Tenure	Ideal for
7-14 days	Planned short term expenses
15-45 days	Saving for an upcoming holiday
46-90 days	Building an emergency fund
3-6 months	Down payment for a large purchase
6-12 months	Saving for annual expenses like insurance premiums

 

Liquidity

 

While FDs are not as liquid as savings accounts, most banks allow premature withdrawals for a penalty. The penalty is usually 0.5% to 1% of the interest rate. Some banks even offer partial withdrawals or overdraft facilities against FDs.

 

This means your money is not entirely locked in. In emergencies, you can break the FD to access funds quickly, though it may incur a small penalty. This liquidity makes FDs a preferred choice for contingency funds and short term savings goals.

 

Earned Interest

 

With FDs, the interest starts accruing from the day you make the deposit. For tenures above 6 months, the interest is compounded quarterly. For shorter tenures, the interest is paid out at maturity along with the principal.

 

Let’s understand this with an example. Say you have booked a 1-year FD of ₹1 lakh at 9.5% per annum with quarterly compounding. Here’s how much you will earn:

• Initial Deposit: ₹1,00,000

• Interest Rate: 9.5% per annum

• Tenure: 1 year with quarterly compounding

• Maturity Amount = P (1 + r/n)^nt = 100000 (1 + 0.091/4)^4*1 = ₹1,09,387

• Earned Interest = ₹1,09,387 – ₹1,00,000 = ₹9,387

 

Your total interest earnings will be ₹9,387. You can use an FD interest calculator to compute your returns for different tenures and interest rates.

 

Better Rates than Savings Accounts

 

Fixed deposits offer much better interest rates compared to savings accounts. Savings account interest rates typically range from 3-4% per annum, while FD rates can reach 7% or higher.

Here’s a quick comparison:

 

Deposit	Interest Rates
Savings account	3-4% p.a.
Short term FDs	4-7% p.a.

 

A 1-2% difference in interest rates can significantly impact your returns, thanks to the power of compounding.

 

Loan against FD

 

Another key benefit of fixed deposits is that you can avail yourself of a loan against your FD. Most banks offer loans up to 90-95% of the FD amount at interest rates 1-2% higher than the FD rate. The loan tenure will be the remaining tenure of the FD.

 

Let’s say you have a 1-year FD of ₹1 lakh at 6% p.a. and need urgent funds after 6 months. Then, you can take a loan against the FD. The bank will give you a loan of up to ₹90,000 at 7-8% interest rate for the remaining 6 months.

 

The best part is that your original FD will continue to earn interest at the same rate. The interest earned will be adjusted against the loan interest. This makes a loan against FD a cost-effective way to meet the best short term investments without breaking your FD.

 

Choosing the Right Short Term FD

 

To get the best out of short term fixed deposits, keep the following factors in mind:

• Compare interest rates of 3-4 banks and NBFCs before booking an FD. Even a small difference in the rate can impact your returns.

• Check the minimum deposit amount and tenure carefully. Some banks have a higher minimum deposit for fixed deposits for the short term.

• If you may need funds in the interim, choose an FD with the lowest penalty for premature withdrawal. Some banks also allow partial withdrawals.

• For tax saving FDs, the minimum tenure is 5 years. Avoid them for short term goals.

• Use an online FD calculator to compare returns for different tenures and amounts.

• Invest only in well-known, nationally trusted banks and financial institutions for safety.

 

Conclusion

 

Fixed deposits are an excellent short term investment option for risk-averse investors looking to park surplus funds for 12 months or less. They offer guaranteed returns, capital protection, flexibility, and liquidity – making them ideal for short term savings goals and contingency funds.

 

What’s more – you can now book an FD from the comfort of your home with Airtel Finance. Airtel Finance has attractive interest rates, nominal deposit requirements, an online FD calculator, and a loan option against FD. With all this, FDs are accessible and convenient for everyone.

 

So the next time you need a short term investment, consider the safe and steady path of a fixed deposit. With assured returns and capital protection, FDs can help you achieve your short term goals without any stress.

 

FAQs

 

1. What are the benefits of short term FD?

Short term FDs offer guaranteed returns, capital protection, flexibility in tenure, liquidity through premature withdrawals, and loans against FD facilities. They are ideal for parking surplus funds for short term goals.

 

2. Why are fixed deposits suitable for short-term investment goals?

Fixed deposits align well with short term investment goals as they offer tenures starting from 7 days upto 12 months. The guaranteed returns and capital protection make them suitable for financial goals with a horizon of 1 year or less.

 

3. How can I choose the best fixed deposit for my needs?

Compare the interest rates, minimum deposit requirement, tenure options, premature withdrawal penalty, and bank credibility. Use an online fixed deposit calculator to compare the returns. Opt for the FD best suited to your investment amount, tenure and liquidity needs.

 

4. How do fixed deposits compare to other short-term investment options?

Fixed deposits offer better returns than savings accounts and liquid funds. Compared to other short term debt instruments, FDs have zero credit risk and guaranteed returns. This makes them one of the safest short term investment options.

 

5. What happens if I need to withdraw my fixed deposit before maturity?

You can withdraw your fixed deposit before maturity, but it may incur a penalty. The penalty typically ranges from 0.5% to 1% of the interest rate, reducing your overall returns.