Investing early in life allows you more time and flexibility to generate wealth. These savings can then be used to meet retirement expenses or to create a corpus for your child's education.
To achieve this goal, it is important to consider at least 2–3 sound investment options. Comparing different options like a savings account and a fixed deposit will help you select the most viable option.
So, here are a few parameters to look at while comparing these two instruments.
Fixed deposits generate higher returns as compared to a savings account. Unlike the 4–5% annual interest that you earn on a savings account, fixed deposits fetch you more than 7% annually. Also, NBFCs usually offer a higher rate of interest as compared to bank FDs.
Flexibility of tenor
Both savings accounts and fixed deposits offer you the ability to select the tenor of your choice. But, depending on the bank and type of savings account you choose, you may have to maintain a minimum balance. Similarly, with fixed deposits, you have the choice to select a tenor for which you want to hold the FD. This can be as short as 12 months, or as long as 5 years.
Calculation of interest
Fixed deposits enable you to choose between periodic returns (non-cumulative fixed deposits) and accumulated returns (cumulative fixed deposits). You can avail interest on maturity if you choose a cumulative fixed deposit or pick an annual, bi-annual, quarterly or monthly payout when you opt for a non-cumulative FD.
Unlike fixed deposits, you can withdraw funds from your savings account, as and when needed. Most banks calculate the interest on your savings daily.
Additional Read: Best schemes for saving your money
Withdrawing cash from a savings account does not incur penalties. You only face a deduction when your withdrawal brings down the funds below the minimum balance amount as specified by the bank.
Similarly, for a fixed deposit, you can prematurely withdraw funds, but this will incur a fee, and may result in you getting a lower rate of interest. So, it is always prudent to check the premature withdrawal terms before you invest.
The interest earned on your fixed deposit is subject to taxation after it crosses Rs. 5,000, in the case of a company FD. However, you can choose a 5-year tax saving FD to save on taxes. On the other hand, liquid cash in a savings account is non-taxable.
Collateral for loan
You can use a fixed deposit as collateral for loans. Many lenders today offer loans against the value of your FD. But, you cannot use the money in your savings account as collateral for loan.
Both, fixed deposits and savings accounts have their own positives. So, understand your needs first and then decide on an instrument that suits your financial targets best.
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