A fixed deposit is one of the most simple and easy-to-understand investment schemes, as it does not require specialized knowledge or skills before investing. Therefore, especially when it comes to senior citizens, they may find it easier to invest in Fixed Deposits as compared to other investment options that require more active management.
Moreover, there are certain tools nowadays that are available such as the FD calculator. This makes the entire investment procedure easier as it helps the potential investor know beforehand what they’ll be reaping from their investment.
What is a fixed deposit?
Also known as a term or time deposit, a fixed deposit is a type of savings account offered by financial institutions/banks. In this investment scheme, you deposit a certain amount of money for a fixed period, ranging from a few months to several years, at a fixed interest rate.
During this investment tenure, the rate of interest remains the same throughout, and you, as a potential investor, earn a guaranteed return on your investment. Once the FD matures, you can withdraw the initial investment as well as the profit made on it. Usually, the longer the duration of the fixed deposit, the higher the rate of interest offered by the financial institution/bank.
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What are the benefits and limitations of Fixed Deposit Interest Rate for Senior Citizens?
Benefits
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Higher rate of interest
Senior citizens are offered a higher interest rate on FDs than regular customers. The prime reason behind this is that financial institutions want to encourage senior citizens to invest their savings in FDs.
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Regular income stream
When you invest in this investment instrument as a senior citizen, you are in for assured returns. This makes it a popular choice among such citizens who want a regular income stream. Further, the interest rate earned on fixed deposits can be paid out monthly, quarterly, or annually, depending on the investor’s preference.
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Low Risk
FDs are considered to be a low-risk investment option. This is because they are able to offer a fixed return of rate and are not subject to market fluctuations. This makes them quite a safe investment choice for senior citizens who want to protect their savings.
Limitations
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Risk of inflation
One of the prime limitations of FDs is that the returns may not keep up with inflation. It cuts down the purchasing power of the interest earned on fixed deposits, which means that the real rate of return may be lower than expected.
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Premature Withdrawal Fine
If, as an investor, you plan to withdraw the money before the maturity date, there is a fine/penalty involved. In addition, senior citizens who may need to access their savings during emergency times may face a fine, which could ultimately reduce the overall returns on their investment.
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Limited Liquidity
FDs have a fixed investment tenure and usually fd interest rates are predetermined most of the times. This means that the investor cannot withdraw the money before the maturity date without facing a fine. This can be a limitation for senior citizens who may need access to their savings in case of an emergency.