A fixed deposit is a comparatively secure investment instrument wherein you invest a sum of money for a specific period of time at a specified rate of interest. This is the most popular form of investment for those who seek secure and stable returns.
But if you are thinking of investing in a fixed deposit, let you be aware of the fact that you can invest for the short-term or long-term. Your return will be different in both cases, and it will help you to make a correct decision for your purpose.
Usually Provides Higher Returns?
Usually, long-term FDs yield better returns due to their higher rates and compounding. But having better returns doesn’t always mean it’s the better option. Take factors like your goals, cash needs, and expectations for future interest rates into consideration.
For instance, if you believe the rates are going to increase in the next 2-3 years then you can proceed with a short or medium tenure FD so that you can reinvest with a better rate later, but if you believe the rates are not going to increase beyond what it is currently, then you should opt for a long term FD to earn maximum returns on your investment. Don’t forget to select reliable financial institutions such as Mahindra Finance which carry good credit rating and offer excellent FDs, both short-term and long-term, with attractive returns.
Short-Term FDs
Pros:
- The money is more “liquid” here; you get your money back sooner. You have more flexibility, so in case an emergency arises, you’re not as stuck.
- If rates do end up rising, you can make the most of the opportunity, as you can re-invest sooner at the current rates.
- This type of FD is perfect for people who need money quickly. If you know you’ll need the money between a year or two, then this is the ideal type of FD.
Cons:
- You usually get lower interest rates here because you’re not committing your money long term.
- Once your FD expires, the new rates may not be as rewarding, so you may miss out on better returns.
Long-Term FDs
Pros:
- Usually, financial institutions give you higher interest rates because you’re locking your money down long-term.
- Over time, your interest can add on a lot, due to the power of compounding, where you earn interest on your interest.
- If rates fall, you keep earning interest at the same rate throughout your FD tenure.
Cons:
- You can’t really access or withdraw your funds without paying a premature withdrawal fee.
- If rates do end up rising, then your money will be stuck at that old rate until your tenure is over.
- The money here isn’t as “liquid”; if something does come up, it will be quite difficult to get the money out.
If you’re looking to invest so that you can save for something way into the future, then a long-term FD is the play due to the fact that you get higher interest rates, which leads to higher compounding. But if you need the money sooner, or you think the rates might get higher, then a short-term FD is the best option.