Why Do People Prefer Investing in Fixed Deposits

By Ruchi Gohri
  | Published: 29 June 2021 | Last Updated On: 07 July 2021
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Most people consider fixed deposits as the best investment option of all times. The choice is so popular that people invest in fixed deposits without even thinking twice. The simple reason behind this confidence is that fixed deposits involve low risk and provide guaranteed returns. And when it comes to the growth of the funds, fixed deposits never fail to deliver.

All the banks and financial institutions in the UAE offer fixed deposits at different interest rates. Interested investors can easily open a fixed deposit account using online and offline modes. 

Here we will help you understand how investing in a fixed deposit is the right choice. Let’s take a look at what fixed deposits are and what are the benefits that they offer.

What is a Fixed Deposit?

A fixed deposit is an investment scheme that allows individuals to invest a lump sum amount for a deposit tenure with fixed interest rates. The fixed deposits enable investors to choose a specific term for their deposit based on their financial needs. They can also opt for a flexible pay-out option to deal with their finances more efficiently. 

With fixed deposit accounts, investors get the flexibility of choosing a cumulative or a non-cumulative plan. If they choose a cumulative plan, the bank calculates the interest on the fixed deposit using the compounding method. This means that the investor can reinvest the interest with the principal amount. Additionally, in the cumulative plan, the investors get accrued interest and the invested amount paid back after the fixed deposit term ends.

However, if the investors choose a non-cumulative plan, they can invest the principal amount for a fixed tenure and get the interest paid on a yearly, quarterly, or monthly basis. The interest pay-out schedule depends upon the choices the investor makes at the time of starting the fixed deposit account.

Fixed deposits offer guaranteed returns as the FD interest rates do not get affected by the market fluctuations. On average, the financial institutions in the UAE offer fixed deposit interest rates ranging between 1 to 4 per cent. However, the interest rates may vary from bank to bank. The fixed deposit calculator can help the investors calculate the interest and maturity amount of the fixed deposit. 

The best part about the fixed deposits is that they allow investors to make premature withdrawals of their principal amount. However, in some cases, the banks charge a penalty on the same. For example, if an investor withdraws 20 percent of the total principal amount, they need not pay any penalty, whereas, if they withdraw 50 percent of the invested amount, they will be charged. The rules for premature withdrawal are different for all the banks. 

Another good thing about the fixed deposits is that the investors can apply for a personal, education, or property loan against their fixed deposit amount to deal with their financial requirements. 

Benefits of Investing in a Fixed Deposit

Here are the significant benefits of using a fixed deposit as an investment option.

1. Safe Investment Option

Fixed deposit is a safe investment option for individuals who wish to invest their savings. Unlike other investment schemes, fixed deposits are not market-driven. They offer interest rates that do not change or fluctuate throughout the year. The investors set their expectations from this investment option at the time of booking it. This helps them in managing their finances better.

2. Guaranteed Returns

Fixed deposit is a safe investment option and offers guaranteed returns for investors. With a fixed deposit, the investors can get the interest pay-outs on a yearly, quarterly, or monthly basis depending upon their financial needs.

3. Tax-Saving Option

Unlike savings or current accounts, fixed deposits are the best tax-saving option. Investors can save their taxes by simply investing in a fixed deposit scheme. The investment made in fixed deposit schemes qualifies for tax exemption under Section 80C of the Income Tax Act, 1961.

4. Backed with Deposit Insurance

Most banks in the UAE offer the fixed deposit schemes backed by deposit insurance plans. This helps investors get their principal amount back fails to return the investors their returns or deposit amount. The insurance allows investors to get full coverage amount based on the policy terms.

5. Encourages Savings

Fixed deposits help individuals in saving their money. People do not hesitate in investing in fixed deposits as they do not attract any kind of financial risk. In addition, fixed deposits do not block their money and allow the investors to withdraw their money anytime they want.

6. Attractive Interest Rates

Fixed deposits offer higher interest rates than other investment options like mutual funds, savings accounts, etc. Even in short-term deposits, the investors can earn interest more than they could make in any savings account.  

7. Higher Returns for Senior Citizens

In savings accounts, the banks offer the same interest rates for account holders of all age groups. However, when it comes to fixed deposits, senior citizens get higher interest rates. 

The Bottom Line

Fixed deposits help you maximize your potential of saving options. Fixed deposits offer a myriad range of benefits and as a cautious investor, you must consider having an FD for self. Make sure to invest in the fixed deposit accounts that offer financial freedom and the best interest rates with maximum safety ensured. 

Ruchi Gohri
Ruchi Gohri40 Posts

Senior Content Writer | She has a penchant for writing and with over 5 years of experience, she plays around with words elegantly, crafting simple content for all to read. In her free time, she loves her couch either to read or catch on to her sleep.