One of my colleagues recently asked for a suggestion. He sold some of his stock holdings to buy a land in his native place. Due to the COVID-19 situation, he was not able to proceed with registering the land. Now, he wants to know the best way to park money for four to six months.
Fixed Deposit (FD) in a bank is the best option. There are reasons why it is considered as the best option for this requirement. Please see the advantages of FD
Advantages of FD:
1. Ease of opening
When I was working in a bank, the depositor must visit the bank to open a deposit unlike today. The depositor will be given lot of respect. They will be served with beverages and the branch manager will even step of his/her cabin to greet the depositor. In my native place, the bank manager will visit the depositor home to collect the deposit amount. Now-a-days, deposits can be opened online with a click. You do not need to visit a bank branch. Most of the banks offers online options to open a FD. Though the mode of opening changed, the ease of opening remains the same
2. Flexible Tenure
FDs are available for very short term to short term to mid-term. There are multiple options ranging from seven days to several years.
3. High Liquidity
FD can be liquidated as soon as the deposit matures. The option to close the deposit even before the maturity period is also available. You can withdraw money, whenever you need, by pre-closing the FD. The only exception is the FD that has 5 years locking period. They are called Tax Saving Deposits and cannot be withdrawn before the maturity date. If you need high liquidity, then you must not put your money in the 5-year locking period FD
So, considering the advantages of Fixed Deposit, I suggested my colleague to open a FD. It is a safe option and comes with zero risk as far as his deposit with a bank is limited to INR 5 lakhs. I asked him to deposit the amount in two to three banks if the amount exceeds INR 5 lakhs. He had INR16 lakhs in hand and was not sure about why he must go to different banks rather than depositing the entire money in one bank. I will explain this in the disadvantages section.
Disadvantages of FD:
1. Risk Factor:
Deposit Insurance and Credit Guarantee Corporation (DICGC) secure FD maturity amount up to INR 5 lakhs only if in case of bank closure or any mishaps. Amount over this limit is subject to risk. Please note that INR 5 lakhs coverage includes the interest as well, so restrict your deposit amount in a bank within this limit, after considering/calculating the interest amount as well. Your deposit amount plus the interest must be below INR 5 lakhs. This is one of the disadvantages of FD.
2. Low Interest Rates:
FD rates are currently very low due to the Covid-19 situation. Also, the rates would be much lower than the inflation rate most of the times, irrespective of Covid-19. Even for long term deposits wherein your money will be locked for a certain period of time, the interest rates are not attractive.
3. Penalty for pre-closure:
Bank will reduce the rate of interest if you close the deposit before the maturity date. Pre-closure is seen as a contract breach and the penalty will be lesser rate of interest.
In a nutshell, Fixed Deposit is a safe option with guaranteed returns for short term investments. You can park your emergency funds corpus into a Fixed Deposit so that it is safe and also grows. FD offers slightly higher interest rates for senior citizens. FD is a very popular investment tool among the senior citizens. However, if you are young and need high returns you might stay away from FD.