Fixed deposits (FDs) are a popular investment option in India. However, investors often wonder whether short-term FDs can yield good returns or if only long-term investments are beneficial.
While long-term FDs offer greater stability and compounding benefits, short-term FDs—ranging from 7 days to 1 year—are ideal for specific financial needs. Here’s when you should consider investing in a short-term FD and key factors to consider.
When to Choose a Short-Term FD?
- Parking Surplus Cash: If you have surplus funds that you may need in the near future, a short-term FD ensures safety while offering better returns than a savings account.
- Emergency Fund Allocation: Keeping part of your emergency fund in a short-term FD can provide liquidity while earning interest.
- Financial Goals Within a Year: If you are saving for short-term goals like a vacation, wedding, or gadget purchase, an FD of up to 1 year provides guaranteed returns.
- Waiting for Better Investment: Investors waiting for better market conditions may temporarily park funds in a short-term FD instead of letting cash sit idle.
- Uncertain Interest Rate Movements: If interest rates are expected to rise, locking funds in a long-term FD may not be beneficial. Instead, a short-term FD allows reinvestment at higher rates later.
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What to keep in mind?
- Interest Rates: Compare FD rates offered by banks and NBFCs. Private banks and small finance banks may offer higher returns.
- Premature Withdrawal Rules: Short-term FDs may have penalties if withdrawn before maturity.
- Tax Implications: Interest earned is taxable under ‘Income from Other Sources’ and subject to TDS if it exceeds returns limit.
- Liquidity Needs: Ensure that funds are not locked away if needed urgently.
A short-term FD is safe for managing liquidity while earning modest returns. However, you must ensure that you know what returns you are going to get and what will be tax liabilities in the short-term for you. For meeting immediate or very short-term goals an FDs can be a good option.
The table below compares the interest rates for short-term fixed deposits:
Fixed Deposit Interest Rates
Banks6 mths – < 1 YearState Bank of India6.25%-6.50%UCO Bank5%-7.30%Union Bank of India5%-6.35%Axis Bank Ltd.5.75%-6%Bandhan Bank Ltd.4.50%Catholic Syrian Bank Ltd.4.25%-7.25%City Union Bank Ltd.6%-7.5%DCB Bank Ltd.6.2%-7.25%Dhanlaxmi Bank Ltd.6%-7.25%Federal Bank Ltd.5.50%-6.50%HDFC Bank Ltd4.5%-6%ICICI Bank Ltd.4.75%- 6%IDBI Bank Limited5.50%-7.05%IndusInd Bank Ltd5%- 6.50%IDFC First Bank Ltd.4.5%-5.75%Jammu & » Read More
