Market Downturn: Is This the Right Time to Invest in Fixed Deposits?

Stock market investors have a problem. The Sensex tumbled nearly 3,000 points at the end of 2024. Foreign investors, wary of weak earnings, pulled back. In fact, as per reports, in November 2024, 79 out of every 100 new SIPs were discontinued. The weakening rupee and rising inflation (forecast – 4.8%) have further added to investor worries. In such uncertain times, it’s essential to diversify your portfolio to keep your investments safe. This is where investing in fixed income instruments like Fixed Deposits (FDs) could help.

Why Invest in Fixed Deposits?

1. Stable Returns

Fixed Deposits are not market-linked products, meaning your returns are unaffected by market volatility. The interest rate remains fixed throughout the tenure. That said, if you decide to break your FD before maturity, you may incur penalties or lose out on the promised rate. Read our detailed explanation on premature withdrawal of FDs.

2. Higher Interest Rates 

It’s a myth that FDs offer low interest rates. For example, Ujjivan Small Finance Bank offers up to 7.75%* p.a. interest rate on Fixed Deposits. Senior citizens can enjoy additional 0.50%* interest rate over standard rates.

3. Tax-Saving Benefits

Tax Saver Fixed Deposits allow you to avail tax deductions up to ₹1.5 lakh under Section 80C of the Income Tax Act, 1961. These FDs have a lock-in period of 5 years, meaning you cannot break your FD within the stipulated time.

4. Power of Compounding 

We have already spoken about how FDs provide stable returns. Now let’s understand how FDs help maximise returns through compounding. In simple words, compounding allows you to earn interest on interest. When interest is compounded periodically and reinvested along with the principal, it leads to exponential growth of the investment over time. You can read more about it here.

5. Helps Create a Regular Income Stream

In terms of interest pay-outs, there are two types of FDs – Cumulative and Non-Cumulative Fixed Deposits. For Cumulative FDs, the interest is paid out at the time of maturity, whereas for Non-Cumulative FDs, interest is paid out periodically – monthly, quarterly, half-yearly or annually. Non-Cumulative FDs are particularly attractive for investors seeking regular interest income.

6. Flexible Tenure and Liquidity

Fixed Deposits come with flexible tenure options, ranging from 7 days to 10 years. This flexibility allows you to align your investments with your financial goals. Additionally, FDs offer better liquidity compared to other fixed income schemes like PPF (Public Provident Fund). That said, the liquidity option is available only for Callable FDs. Also, it is generally recommended not to break your FD before maturity so that you can enjoy optimal returns.

7. Up to ₹5 Lakh of Your FD Investment Insured

Each depositor is insured up to ₹5 lakh per bank under DICGC (Deposit Insurance and Credit Guarantee Corporation). The amount includes both the principal and interest, offering a safety net to your investment.

Should You Consider Investing in Fixed Deposits Amid Market Volatility?

Amid the growing market volatility, investing in Fixed Deposits (FDs) is not just an alternative but a necessity for safeguarding your wealth. With stock markets frequently swaying due to global uncertainties and economic fluctuations, FDs offer a reliable way to insulate your finances from the vagaries of unpredictable market conditions.

Unlike equities, which can be subject to sharp and sudden dips, FDs provide a fixed and guaranteed return, ensuring financial stability even in turbulent times. They act as a buffer, offering peace of mind that your capital remains secure while earning steady interest. In an environment where market unpredictability is becoming the norm, FDs stand as a pillar of consistency and safety for prudent investors.