Advantages and Disadvantages of Fixed Deposit

Fixed deposit is perhaps the best investment as far as conservative investors are concerned because they offer a guaranteed return and have a low or almost negligible risk. However before investing in fixed deposits, one should carefully look at both advantages and disadvantages of fixed deposit-

Advantages of Fixed Deposit

Guaranteed Return

First and foremost advantage of investing in Fixed Deposits is that it offers guaranteed return so as an investor you do not have those sleepless nights where you keep thinking whether my investments are safe or not and what will be my return. In other word investors who want to have peace of mind prefers fixed deposit as compared to investment in the stock market or commodity market.

Liquidity Support

Fixed deposits are very liquid hence one can withdrew the money whenever one wants cash for various purpose like marriage, sickness and other urgent needs. Though premature withdrawal results in some loss of interest income but it is still better than selling stocks or real estate investment where you cannot sell the asset instantly because they are of high value and also they are not that marketable and if you are in urgent need of cash then you may have to sell the asset at distressed value rather than true value.

Flexible in Nature

Fixed deposits are very flexible in nature because one can have fixed deposits with maturity for 1 month or 1 year or 10 year and also one can make a fixed deposit with any amount unlike real estate where one needs to invest heavily.

Disadvantages of Fixed Deposit

Low Returns

Biggest disadvantage of investing money in fixed deposits is that its returns are low and if the inflation is very high fixed deposit investors are the worst hit as the return from fixed deposit may not be sufficient to cover the high expenses due to inflation.

No Diversification

If one invests all of his or her money in fixed deposits then he or she may not enjoy the benefits of diversification which one get if one invests the money in stock market, real estate, gold and other alternate investments.

Taxation

As far as taxation is concerned fixed deposits are taxed at normal rates of taxation and hence one cannot take the tax benefit from this investment.

As one can see from the above that investing in fixed deposit has its own pros and cons but as an investor one cannot ignore this investment and that is the reason why one should always allocate some amount of the portfolio towards the fixed deposit.