Pros & Cons
It is usually believed that once the funds are parked in a FD, they are blocked until maturity. But it is not the case as there is a facility of breaking a fixed deposit. Breaking a fixed deposit means withdrawing the money before the expiry of the deposit's tenure. However this may be avoided unless one is in urgent need of funds as the rate of interest stated on the FD falls. Instead of breaking the FD for a smaller amount of money or a short while compared to the maturity of the FD one can avail the option of taking a loan against the FD. Such loans are easily available with amounts ranging up to 90 percent of the principal and accumulated interest on the FD.
Fixed deposits also enable one to earn a regular income through the interest payments that are made every month or quarter. This option is especially used by the people who are retired and looking for continuity in their income.
On the other hand, a fixed may be one of the safest instruments but it does not offer you the same returns that you could earn by investing in the equity market. This is the cost one pays for getting the assured returns that are not promised in case of stocks or mutual funds.
Also a fixed deposit does not consider the inflation rate which means that it does not offer inflation adjusted interest rate. This often leads to a fall in the real rate of return. For instance a high inflation rate can simply cut down your real returns. If the inflation rate is 3% at the time of investing the money on a FD of 8% and it rises to 5% when the FD matures, then the real rate of return (interest rate - inflation) is only 3%.
FDs Vs FMPs
Fixed Maturity Plans (FMPs) are considered to be the best alternative for FDs. They are popularly known as the equivalent of a fixed deposit in a bank, with a caveat. The maturity amount in this case is only ‘indicative' unlike the ‘assured' returns in FDs.
FMPs are debt schemes where the money is invested in fixed-income assets like governments bonds and money-market instruments which carry a low risk. They are closed-ended in nature, which means that once the NFO (new fund offer) closes, the scheme cannot accept any further investment.