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Short-Term vs Long-Term Deposits: Which one Should you Invest?

Fixed deposits (FDs) are one of the best investment options that people in India prefer, owing to their high and guaranteed ROI. According to RBI, around 58% of the Rs. 117 Lakh Crore deposits in financial institutions were fixed deposits as of March 2018.

Nowadays, financial institutions allow investors to open an FD account online. They can choose a flexible tenor and get high-interest rates which make their ROI profitable.FDs usually have a lock-in period ranging from 12 months to 60 months, on which the interest rate largely depends.

Investors mostly get confused in choosing between a short-term deposit and a long-term deposit. Both these options have their own perks and conditions.

Short-Term Deposits

As the name suggests, short-term fixed deposits have a shorter tenor; which means your deposit matures within a year. However, you earn a lower fixed deposit interest rate with a short-term investment compared to a long-term scheme. This investment option helps people having a long income or immediate financial expenses to cover.

Long-Term Deposits

Long-term FDs come with a higher rate of interest and are considered one of the best investment options. The only drawback of long-term deposits is that funds stay locked-in for a prolonged time. You can’t access your money during urgent cash requirements.

However, financial institutions also offer the option of premature withdrawal but only against a fee. This premature withdrawal charge increases with the FD amount. Generally, it ranges from 0.5% to 1%.

You can go for loans from reputed NBFCs instead of breaking your FD during financial crises. Lending institutions offer attractive features and benefits on personal loans or loans against fixed deposits.

Bajaj Finserv being a top-notch NBFC provides Personal Loans up to Rs. 30 Lakh with features like pre-approved offers. Pre-approved offers make the procedure of getting loan straightforward and save your time. You can also avail this offer on home loans, business loans, and numerous other financial products and services. Provide only a few essential details to check your pre-approved offer.

How to pick the right investment term?

Most people opt for a mix of long-term and short-term FDs. This way, they invest a small amount for a longer term and a larger amount for a shorter term. Here, an FD calculator helps in assessing the returns beforehand.

However, you must consider the following factors before doing any of that:

  • Your financial goals 

Everyone wants to enjoy a higher interest rate on FD with a longer tenor. However, the tenor you choose should align with your financial objectives.

For example, go for a short-term investment if you are planning to make an expensive purchase the next year. These purchases can include buying a vehicle, going on a vacation, etc.

On the other hand, invest in a long-term plan if you have to spend a high amount in the future, like a wedding or higher education of your children.

  • Income/savings 

A long-term investment is apt if you have a high income or savings. Your income can save you during emergencies, even if a substantial portion of your savings remains locked-in for a prolonged period.

  • Income tax 

Long-term fixed deposits will provide higher interest. And, interest earned on FDs is taxable if it crosses Rs. 10,000. In such cases, you can invest in tax-saver fixed deposits. These have a minimum lock-in period of 5 years. These FDs can provide you with tax benefits of up to Rs. 1.5 Lakh.

A fixed deposit calculator can help you find the right investment to go for. Almost all financial institutions provide with these calculators which can be used online.

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Written by Nitin Arora

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