In the last few months, various banks and NBFCs have harboured aggressive growth in the fixed deposit interest rates they offer. Hence, we see FDs giving other investment options a run for their money. It is understandable for you to, therefore, consider FDs as another investment or savings option.
Deciding the tenor of your investment can be one of the most vital decisions you could take since your interest returns are heavily dependent on the term of the FD. Thus, understanding the difference between long-term and short-term FDs and how they can benefit your future goals is a prerequisite.
What are Long-term and Short-term FDs and How Do They Differ?
When you decide to invest or save with an FD, you are required to make many important decisions surrounding your FD type, FD category and tenor. Hence, understanding what long-term and short-term FDs are and how they affect your returns is vital to starting your journey as an investor.
- Long-term Fixed DepositsIf your FD tenor ranges between 5 years and 10 years, that deposit can be considered a long-term FD. This makes room for more interest returns and the security of your hard-earned savings for a longer period of time.
- Short-term Fixed DepositsShort-term FDs can have tenors as short as 7 days. Some banks and NBFCs start their short-term FD tenors at 12 months as well. Short-term FDs cannot be reinvested in, but they can be renewed upon maturity.
Which Is Better: Long-term or Short-term?
Long-term and short-term FDs contribute to various goals depending on the investor’s priorities, all the while being highly profitable and secure. To understand the benefits of both and how they can fit your ambitions, you can find below how they can respectively benefit you.
- Long-term Fixed DepositsLong-term FDs serve best for goals that lay way ahead in the future. It could be educational goals, professional goals, business goals, healthcare goals, etc. Here is where long-term FDs become more of an investment tool than a savings tool.
Taking a non-cumulative FD with a tenor of 5 years to 10 years could be a wise decision since the fixed deposit interest rates earned are higher than that of a cumulative short term FD. Additionally, reinvesting the returns offers you the opportunity to earn interest through interest, therefore, multiplying your capital more than you could imagine.
Choosing a corporate FD in the case of a long-term FD can be very beneficial since they offer higher interest rates than that of bank FDs. Furthermore, with already high corporate FD rates, senior citizens earn extra perks upon booking an FD.
Considering senior citizens as prime investors in FDs, the interest rates for them experience a hike of 0.25% regardless of how high or low the regular interest rate is. In the case of senior citizens, more than 8% of interest returns can be earned should you choose the right FD to invest with. Hence, the returns are not only increased by a considerable margin for senior-citizen investors, but the act of reinvesting the interest returns back into your non-cumulative long-term FD can build your corpus exponentially.
- Short-term Fixed DepositsShort-term FDs work best in the favour of goals that need to be achieved over a smaller period of time. These could include big-ticket purchases to be made in the near future or productively saving money that isn’t necessarily to be used long-term. Hence, short-term FDs serve better as a money-saver than an investment.
You could wisely turn the market tide towards you with the help of a short-term FD. You could invest in an FD for 7 days to 12 months and earn the maturity amount at the end of its tenor. Armed with an analysis of the current market, you could reinvest the total maturity into another short-term FD and continue this cycle, therefore, building your corpus at a colossally fast pace.
There is always the angle of investing on behalf of the senior citizens of your family to utilise the benefit of larger interest returns since special interest rates, increased by 0.25% by law, are offered to senior citizens. Should you worry about taxation, senior citizens are given an increased limit of ₹50,000 per annum after which they will be taxed by 10% to 20%.
Furthermore, when it comes to short-term FDs, certain banks and NBFCs offer higher interest rates as compared to long-term corporate FD rates. For example, an NBFC could offer you an interest rate of 7.25% for a tenor of 1 year while a 5-year tenor is offered 7.00%.
Additionally, picking a cumulative short-term FD can benefit you greatly since certain NBFCs and banks offer you greater fixed deposit interest rates as compared to non-cumulative FDs. For instance, if a bank offers 6.75% for a short-term cumulative FD with a 1-year tenor, its short-term non-cumulative FDs could offer 6.70%.
Let’s make a compromise here; short-term and long-term FDs are equally beneficial, albeit in different ways. Long-term FDs help your goals that lay in the further future and assure consistent returns. Short-term FDs harbour a taste for the risk-takers and allow you to play with your investments to build them exponentially. Either way, financial freedom and empowerment is yours for the taking when you have FDs backing you up.
This is a Partnered Post.
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