A fixed deposit is a term financial instrument that is offered by NBFCs and banks where people can deposit their lump sum money for a fixed tenure and get a higher rate of interest than a regular savings account. It assists one in saving taxes.
Before unlocking the secret of why FD works for the long term let us understand the fundamental difference between Short term FD and long term FD. The short term fixed deposit refers to those fixed deposits whose time hovers in the range of 7 days to 2 years. There is a penalty involved in withdrawing the money before the tenure. So, it is always better not to withdraw before the end of the tenure. These term deposits can also be taxable. On the other hand, the long FD deposits are the deposits whose terms lie in the range of 2 to 10 years. Most often, the interest earned by long term deposits is not taxable.
Benefits of the Long Term fixed Deposit
1. Higher rate of interest
The rate of interest on FDs increases with tenure. The higher the tenure, the higher the interest rate. Generally, the interest rate on the short term is not of much use as it is only able to offset the inflation rate; however, the long term FD provides individuals with an opportunity to create wealth. The difference between the short Term Fds and Long term FD interest earned makes it worth to forego short term FD and invest in the long term.
2. Encourages people to save money
A long FD account holder will inadvertently save money since FDs require the holder to invest a lump sum amount for a fixed period of time, and premature withdrawals attract penalties. Individuals with bad spending habits tend to spend their funds unnecessarily. A Long term fixed deposit investment helps to lock the funds for a period of up to 10 years. Thus, it creates wealth. Whereas the short tenure FD does not have come with this benefit as the maximum tenure of short tenure FD is two years.
The long tenure of FDs varies from 2 years to 10 years. An individual can invest in long Term FDs for a period according to their requirements. This provides the individual to choose the tenure which will best suit his financial plans.
4. Building trust
Long term FD is not just about investment in the bank and creating wealth. It is way more than just profit; it is about creating a relationship. When the long term FD is opened with a bank, it builds a rapport between the bank and the individual.