Fixed Deposits for Short-Term vs. Long-Term Goals: Matching Your Investment Horizon

Before opting for an FD, it is important to consider various aspects and plan accordingly. These can include the sum deposited, interest rate, and, more importantly, the tenor. Here, choosing between a long-term and short-term tenor can significantly impact your returns and how quickly you can access your funds.

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For instance, long-term FDs provide you with higher returns and much better liquidity, which can last for quite a while, thereby helping you meet your financial goals. Conversely, short-term FDs can enable you to grow your funds over a short period, usually up to 2 years. You can plan your fixed deposit maturity based on your financial situation and liquidity requirements.

Find out more about the benefits of choosing a short-term and long-term FD, along with the key differences between them:

Short-term FDs

Under a short-term FD tenor, you make deposits between a minimum of 7 days and a maximum of 2 years. This can let you multiply your earnings for a short tenor and is ideal for quick liquidity requirements without any partial or premature withdrawals. Some of its features and benefits are:

• – Low minimum deposit amounts ranging between Rs 1,000- Rs 15,000 across various issuers
• – Assured safety with no market-linked risks
• – Short lock-in periods
• – Higher interest rates than savings accounts
• – The power of compounding can be leveraged
• – Ideal for short-term requirements such as buying a vehicle or gifts for friends/family

It is important to note that the interest from short-term deposits may be liable to taxation. You can also opt for a non-cumulative FD scheme wherein the interest payouts can be done either on a monthly, quarterly, semi-annual or annual basis. For example, you can earn a payout of Rs 690 on a Rs 1 Lakh fixed deposit at an interest rate of 8.60% p.a. every month with a non-cumulative monthly payout scheme.

Long-term FDs

In a long-term FD tenor, you will be allowed to deposit funds for an extended period at a predetermined rate of interest, ranging from around 2 to 10 years. Due to its nature, the FD interest rates offered are generally higher than its short-term counterpart, allowing you to maximise your earnings. Some of its benefits and features are:

• – High interest rates offered by various issuers
• – Senior citizens can receive an additional interest rate over the base value
• – Flexibility in choosing your deposit amount, preferred tenor, and maturity terms
• – Provision of loan or overdraft against your FD
• – Availability of auto-renewal feature, wherein your FD can be automatically renewed on maturity
• – Functions as an emergency repository of funds for quick requirements
• – Potential tax savings benefits under Section 80C of the Income Tax Act, 1961
• – Funds can be utilised to meet your long-term requirements such as purchasing property, vehicles, or for education.
• – Credit score building through credit cards against long-term fixed deposits

It is important to remember that while making partial or premature withdrawals, you will either be subject to penalties such as fines or lowered interest rates.

The most useful benefit of choosing long-term FDs is the ability to compound your returns each year. This means that the subsequent interest will be applicable not only to your principal amount but also to your earned interest.

Compound interest calculation

The following formula can calculate simple interest:

Interest = Principal amount x interest rate x tenor / 100

On the other hand, compounded interest can similarly be calculated. This is except for determining the interest earned during one year and adding it to the existing principal amount. For instance, a principal amount of Rs 1,00,000 deposited with an interest rate of 8% can have an interest amount of

1,00,000 x 8 / 100 = Rs 8,000

This is then be added to the principal for a new total of Rs 1,08,000, which will then be added to each subsequent year. The new interest amount can be calculated as follows:

1,08,000 x 8 / 100 = 8,640

The new amount is then added to the existing principal, bringing the total to Rs 1,16,640, which will be further compounded. However, this is also dependent on the FD tenor.

Choosing between short-term and long-term FD tenure

The decision to opt between a short-term and long-term FD can solely be on your investment horizon and certain external factors. These could be aspects like the anticipation of falling interest rates. During such a scenario, it is ideal to go for long-term fixed deposits, as they can ensure you get returns at a fixed rate.

On the other hand, it is suitable to go for short-term FDs during inflation, as the interest rates are anticipated to be high during then. Another factor to consider is that of penalties incurred during premature or partial withdrawals, as the amount charged can vary between the two tenor ranges.

Therefore, both can have their own benefits and disadvantages, and it becomes important to assess these carefully before choosing between the two.

Disclaimer : The above is a sponsored article and the views expressed are those of the sponsor/author and do not represent the stand and views of The Tribune editorial in any manner.