Fixed Deposit vs. Savings Accounts: Which is Right for You?

As the saying suggests, ‘Saving for a rainy day is wise.’ But where exactly should one stash this rainy day fund? When it comes to saving your hard-earned money, two popular options come in: fixed deposits (FDs) and savings accounts. Both serve different purposes and offer unique advantages and drawbacks. This blog will discuss their differences to help you decide which is right for you.

What is a Fixed Deposit Account?

A fixed deposit is an investment product that banks and non-banking financial institutions offer. You invest a lump sum amount at a fixed interest rate for a predetermined period. These interest rates are generally higher than savings accounts and vary depending on the institution and chosen tenure (the period for which your money is locked in). FDs are available for terms ranging from 7 days to 10 years.

FDs are ideal for long-term goals or retirement savings due to their higher interest rates and guaranteed returns.

Fixed Deposit Account’s Pros and Cons

Pros:

• Flexible Tenure:

You can choose the investment period (usually between 7 days and 10 years) that best suits your goals with an FD. Longer tenures typically come with higher interest rates.

• Guaranteed Returns:

Unlike stocks, FDs offer a degree of certainty. This means you’ll know exactly how much interest you’ll earn upon maturity (when the FD term ends). This makes them good for long-term savings like buying a house, funding a child’s education, marriage, or retirement planning.

• Tax Advantages:

Fixed deposit interest often enjoys tax benefits, making them attractive for those seeking tax-efficient investments.

Cons:

• Limited Access of Funds:

You can’t easily access your money in an FD until the tenure ends. If you withdraw early for emergencies, you’ll have to pay penalty charges, which can lower your overall returns.

• Interest Rate Lock-in:

Once you invest in an FD, the interest rate gets locked for the chosen tenure, and you cannot benefit from future interest rate hikes (if any).

What is a Savings Account?

A savings account is a simple financial tool that allows you to deposit funds and earn a modest amount of interest. Think of it as a secure locker for your money, where you can save your desired amount, easily access your funds, and earn a small return. It is an ideal choice for keeping your emergency funds or saving for short-term financial objectives like buying a car, home repairs, or vacations.

You can open a savings account at both banks and non-banking financial firms.

Savings Account’s Pros and Cons

Pros:

• Easy Money Access:

As mentioned earlier, savings accounts give high liquidity. This means you can easily access and withdraw your money anytime. This feature makes them suitable for addressing immediate financial needs.

• Easily Available:

Savings accounts are widely available across banks and non-banking institutions, making it convenient to open one.

• Quick and Affordable Setup:

Opening a savings account usually requires a small initial deposit, making it accessible to those with limited funds.

Cons:

• Lower Interest Rates:

Savings accounts typically come with low interest rates. Many banks offer interest rates of less than 1% on these accounts, often failing to keep pace with inflation, resulting in a decrease in the purchasing power of your money over time.

• Minimum Balance Requirements:

Many savings accounts require a minimum balance. If your balance drops below this limit, you’ll face penalty charges that can quickly eat your earned interest.

Fixed Deposit vs. Savings Account: A Side-by-Side Comparison

Fixed Deposit vs. Savings Account: 6 Key Differences

• Interest Rates:

FDs typically offer better interest rates (typically ranging from 7% to 8%) compared to savings accounts. This allows your money to grow at a faster rate, especially when considering inflation which can erode the value of savings accounts with lower rates.

• Tax Advantages:

Some FDs qualify for tax deductions, helping you save on taxes and maximise your returns. Savings accounts, on the other hand, don’t typically offer these benefits.

• Savings Discipline:

FDs lock your money in for a chosen term, encouraging disciplined saving habits. Unlike savings accounts where easy access can tempt you to dip into your savings more frequently, fixed deposits help you stay on track with your financial goals.

• Loan Possibility:

Fixed deposits can be used as collateral for loans. This means you can borrow money using your FD as security, which may not be possible with a savings account.

• Tenure Flexibility:

FDs provide flexible tenures ranging from a few weeks to 10 years. This allows you to customise your investment plan to align with your short- or long-term goals. Savings accounts don’t offer this kind of flexibility.

• Liquidity:

While savings accounts offer easy access to your money, they may have daily withdrawal limits set by your bank. FDs, on the other hand, restrict access to your money until maturity. However, some institutions allow for early withdrawals with penalties that reduce your overall earnings.

The Bottom Line

Both FDs and savings accounts are essential tools in personal finance. FDs are suitable for long-term goals, offering higher returns with guaranteed interest. On the other hand, savings accounts offer convenient access to funds, making them ideal for short-term goals.

While this advice might sound familiar, it’s crucial to evaluate your financial situation and goals when choosing between the two.

Here’s a helpful tip: Consider maintaining both types of accounts simultaneously to manage your finances effectively. Contact your financial advisor to learn more.