Stacking up savings in a fixed deposit scheme is probably the most preferred investment scheme of the Indians. This popularity has stayed since a long time owing to the minimal risk, guaranteed returns and high FD interest rate. While opening a fixed deposit account doesn’t involve any complicated procedure and is quite straightforward, deciding between long term and short term fixed deposits can be confusing.
Short-Term Or Long-Term FD: Which FD Is Best For You?
Both the schemes have their own set of pros and cons that vary on a subjective basis. Your financial standing, the FD interest rate, the amount you deposit are three of several factors that determine which option is better for you. It is therefore good to know some basic differences between the two which will help you to make the right choice.
Short term deposits
The lock-in period of a short term FD generally ranges between 1 to 12 months so you won’t have to wait long to access your money. Better still, if you come across a more lucrative value investment scheme then you can shift your money there after the short lock-in period. The interest rate isn’t as high as long term FDs but still higher than savings accounts. The returns from these deposits are taxed and if you withdraw money before maturity then there is a reasonable penalty.
A short term deposit is ideal for you if you have a goal to accomplish in the immediate future, like maybe a vacation you have planned for. Also if you have just begun investing in fixed deposits and do not want to tie down your money for a long time, then this is ideal for you.
Long term deposits
This option has a lock-in period of minimum 12 months and can go on for years. Due to this, the interest rate is much higher than any other types of FD. Banks and other financial institutions also offer loan against FD on long term fixed deposits. This scheme can act as ready liquid cash for you whenever the need arises.
Long term deposits have a longer lock-in period which means you cannot withdraw your money for the long period after which liquidifying is processed very quickly. If you have long term goals such as funding a wedding, then this option is ideal for you. This is also a good choice if you think interest rates may fall in the future in which case you should go for a longer period fixed deposit scheme and lock-in the current rates.
As has been already established before, fixed deposits are a very rewarding investment option. Getting confused between which term to choose is quite natural but it depends completely on your financial health, future plans and general economic standing. The best option is to invest in both long term and short term fixed deposits simultaneously and in combinations. Having a short term FD at an interval of say 12 months will ensure liquidity of your money. You can put that money to any use or reinvest for better returns.