Fixed Deposit: Know why an FD is a relevant option for your portfolio

Fixed deposit is one of the conventional investment options that is opted by many, especially in India. Over the years financial instruments like mutual funds, stocks, and bonds have gained popularity but fixed deposits are still considered a safer option. If you are building your investment portfolio then there are several reasons why fixed deposit should be a part of it.

Below we have discussed how investing your money in a fixed deposit option can benefit you:

1)  Guaranteed returns

Unlike other investment options, fixed deposit offers guaranteed returns. When you decide to open a fixed deposit account with any lender, you are informed about the interest rate and the total amount you will get after maturity. With the interest rate being fixed, you also don’t have to worry about the market conditions.

2)  Balances portfolio

It is always advised to diversify your portfolio and invest in different instruments instead of putting all your eggs in one basket. This helps in reducing the overall risk. Opting for a fixed deposit can also be beneficial as it balances the portfolio consisting of high-risk investment options such as equity and mutual funds. A fixed deposit is immune to market forces and might save you when your other investments don’t bear any fruit.

3)  Long—term plans

Investing in stocks, cryptocurrency and mutual funds doesn’t guarantee you a certain amount at the end of a certain period. But, fixed deposits offer this benefit. Since in a fixed deposit you are aware of the maturity amount, you can set long-term goals for yourself that can be anything from buying a new car to going for an international trip.

4)  Cumulative and non-cumulative FD

An individual can choose between cumulative and non-cumulative FD as per his needs. In cumulative FD, the interest is paid with the principal amount after maturity while in non-cumulative FD, it is paid annually, semi-annually, quarterly or monthly.

Non-cumulative FD is advised for those who depend on the interest earned to pay their bills while cumulative FD can be opted by those who want to keep their investment locked till the end of the tenure.

5)  Flexibility

Once you have opened a FD account, you can still withdraw your funds before maturity in case of a financial emergency. The process to withdraw funds is simple. However, in this case, one has to pay a penalty between 0.5% to 2% for prematurely withdrawing the amount.