Fixed deposits or FDs are one of the most popular and conventional investment options for Indians across different age groups. However, there are different types of fixed deposits available based on tenure – short-term FDs and long-term FDs. As an investor, it is important to understand the key differences between these two in order to choose the most suitable option. This article deep dives into the various aspects of short-term and long-term FDs to help readers make an informed decision.
What are Short-term FDs?
Short-term FDs have a tenure of anywhere between 7 days to six months. The key aspects of short-term FDs are –
- Lower interest rates: Fixed Deposit (FD) interest rates are directly proportional to the tenure – the longer the tenure, the higher the interest rate offered. Short-term FDs, with a tenure of up to six months, offer comparatively lesser interest rates compared to long-term FDs.
- Liquidity: The biggest advantage of short-term FDs is high liquidity. Investors can withdraw funds after the initially agreed lock-in period without any penalty. This makes short-term FDs a good option for parking emergency funds.
What are long-term FDs?
FDs with a tenure of more than a year up to 10 years are considered long-term deposits. Some key aspects of long-term FDs include the below,
- Higher interest rates: As the lock-in period is longer, normally interest rates offered on long-term FDs are higher than short-term FDs.
- High safety: Reputed public and private banks offer sovereign guarantee on timely payment of interest and principal on long-term FDs, making them a very safe investment instrument.
- TDS on long-term FDs: Interest income exceeding ₹40,000 per annum from FDs attracts TDS at the rate of 10% under Section 194A of the Income Tax Act. If PAN details are not provided to the bank, a TDS of 20% is applicable.
- High returns: Due to the power of compounding, long-term FDs may offer higher overall returns compared to short-term ones.
- Inflation protection: Long-term FDs ensure steady inflation-adjusted income if held for 5-10 years as interest rates factor in projected inflation.
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Who should consider short-term vs long-term FDs?
The below table summarizes who should consider short-term vs long-term FDs based on their financial goals and risk profile.
Table
| Objective | Suitable Option | Rationale |
| Park Emergency Funds | Short-term FDs | Higher liquidity but penalty may apply for premature withdrawal |
| Tax Savings under Section 80 C | Long-term FDs | Tenure must be 5 years for tax savings under Section 80C |
| Regular Income | Long-term FDs | Ensure steady income for 5-10 years with safety of capital |
| Medium term goals (3-5 yrs) | Long-term FDs | Higher interest rates for FDs over a couple of years |
| Long term goals (8-10 yrs) | Long-term FDs | Higher overall returns and protection from inflation over the long run |
Key things to consider when choosing FD tenure
There are some important factors an investor must evaluate before choosing between short-term and long-term FDs.
- Interest rates: Check the current FD interest rates being offered and forecast future rate trends based on macroeconomic conditions.
- Liquidity needs: Consider the ability to lock away funds for longer periods without needing access to capital.
- Financial goals: Match the tenure of FD with time left to achieve different goals like child’s education, retirement, etc.
- Tax benefits: Evaluate pre- and post-tax returns based on applicable tax slabs under Sections 80C and 194A.
- Inflation factor: Long-term FDs better hedge inflation risk than short-term ones over many years.
- Stability of the bank: Reputed public sector banks are safer bets for long-term investments than smaller private banks.
- Exit load: Consider whether premature withdrawals will attract penalties, and if so, the costs involved.
Conclusion
Both short-term and long-term fixed deposits have their respective places in an investor’s portfolio and the choice depends on individual needs, goals, risk appetite and current market environment. A balanced approach with a prudent mix of both options tailored to specific objectives would maximize risk-adjusted returns over different timeframes. Proper due diligence and financial planning are essential before finalizing the most suitable fixed deposit investment strategy.
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