Fixed deposits (FDs) offer safety of the principal amount along with guaranteed returns. One of the key benefits of FDs is that you can choose the terms based on your funds’ requirements and make use of the money as and when you wish. Also, you can avail the funds with interest and reinvest as and when you get the chance to lock-in your money for a higher interest rate.
Short-term FDs typically range from a few weeks to a year attracting investors seeking liquidity while earning better returns than a savings account. Let’s understand the benefits of short-term FDs and what you should do.
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Short-Term FD
Short-term fixed deposits are investment instruments where an investor deposits a sum of money with a bank or financial institution for a tenure ranging from 7 days to 12 months depending on the financial institution. In return, the institution offers a fixed rate of interest, which is higher than that of a regular savings account but lower than long-term FDs. The interest earned can be paid out at regular intervals or compounded, depending on the investor’s preference and the bank’s policies.
Why to Opt for Short-Term FD?
* Liquidity and Safety
One of the prime advantages of short-term FDs is their liquidity. Investors can park their funds for a short period without locking them in for years. This is particularly beneficial for those anticipating the need for funds in the near future.
Moreover, FDs are one of the safest investment options, especially when placed with reputed banks. They are covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance for up to ₹5 lakh per bank per depositor, adding an additional layer of security.
* Lower Interest Rate Risk
Interest rates are subject to market fluctuations. Short-term FDs allow investors to reinvest at potentially higher rates when the current deposit matures, thereby mitigating interest rate risk.
* Returns and Trends
Unlike market-linked instruments, FDs offer assured returns, making them suitable for conservative investors who prioritize capital preservation. As of 2024, the interest rates for short-term fixed deposits range between 4% and 7.25% per annum, depending on the bank and the tenure of the deposit. Small finance banks often offer higher interest rates compared to bigger banks to attract depositors.
Tips for Investors
* Compare Rates
It’s essential to compare interest rates across different banks and financial institutions. Websites and financial apps provide updated comparisons, making it easier for investors to choose the best rates available.
* Laddering Strategy and Reinvesting
To balance liquidity and returns, investors can adopt a laddering strategy—dividing the investment into multiple FDs with varying maturities. This approach ensures that a portion of the investment matures periodically, providing regular liquidity. Keep an eye on the maturity dates and plan for reinvestment. Given the fluctuating interest rates, it might be advantageous to reinvest in new FDs offering higher rates.
* Tax Implications and Premature Withdrawal
Interest earned on FDs is taxable. If you are investing for tax-saving, you can opt for tax-saving fixed deposits with a five-year lock-in period under Section 80C of the Income Tax Act, although these are not short-term. Also,keep in mind penalties on premature withdrawals, which can erode the interest earned. Some banks offer flexible FDs with minimal penalties, making them a more attractive option for those requiring frequent access to funds.
If you need money in the short term, then short-term FDs can help you earn interest and help you access your liquidity in less than a year along with opportunities to reinvest the money, if needed. The table below compares the FD interest rates of 15 banks, including SBI, PNB, BoB, HDFC Bank, ICICI Bank and Axis Bank. You can check this out and decide on whatever suits your investment goals.
