Everyone, for at least once in their lives, would have faced a question, what should they do with this sum of money? Whether they go ahead and deposit their hard-earned money in their savings account or make a fixed deposits with their banks? Both sides of this question look equally pertinent given the fact that any decision about parking the money must be made only after answering all possible queries.
In this article, you would be learning about Bank fixed deposits and saving accounts. You will also determine which of these options are better and where you should go ahead with your money to park. But, first of all, let us understand what fixed deposits and saving accounts are and how do they function in India?
Table Of Contents…
- Savings Account
- Types of Savings Account
- Features and Benefits of Savings Account
- Fixed Deposits
- Types Of Fixed Deposits
- Benefits of Fixed Deposits
- Savings Account vs Fixed Deposits
Savings Account
A saving account can be understood as a type of bank account that provides a safe space to park all your money. Storing your money in a savings account also gives you a chance to earn compounding interest.
This is an account that allows you to deposit and withdraw money according to your convenience. In simpler language, if you go to a bank and ask them to open an account to store your money, at most chances, that bank account would be a savings account. Here, you have the facility to deposit and withdraw money at your liking. But if you keep your money deposited, you might also receive compounding interests on the balance of the account.
Types of Saving Account
There are various types of saving accounts such as:
- Regular Saving Account
These are your regular savings accounts that you open with your bank of choice. For example ‘Jan Dhan bank accounts’ under the aegis of PMJDY can be considered as regular saving accounts.
They are opened by the banks on basic terms and conditions. Often, these kinds of accounts do not see regular deposits and withdrawal of consistent amounts. It can be considered as a locker in your almirah where you keep the money for safekeeping and take it out when required.
- Salary-based Saving Account
These are the accounts opened by banks through your work organization to enable a platform for the monthly payment disbursal. It is here that you receive your salary on a fixed timeline. Many organizations may consider the basic savings account also as a salary account.
Here, banks offer preferential rates and terms for such accounts. So, when the date of your salary becomes due, they withdraw the amount from the company’s account and transfer the same to your account. It is this networking that allows a timely disbursal of salaries and reduces the manual toll on account teams.
It should also be noted that most salary accounts do not have the requirement of a minimum balance. These accounts also get converted into regular saving accounts if the salary is not credited consecutively for 3 months.
- Senior Citizens Saving Accounts
This account is almost similar to a regular savings account but they offer higher rates of interest for senior citizens. It is this account that often lures senior citizens who retire to put their money here rather than a fixed deposit. These accounts are linked to the other senior citizen saving schemes and consolidate funds from retirement accounts, pension funds, and other schemes.
Apart from these saving accounts, the other types of saving accounts are Minor saving accounts, zero balance saving accounts and women saving accounts made tailor-fit according to the needs of women in modern-day scenarios.
Features and Benefits of Savings Accounts
There are several features associated with savings accounts. They are:
- These accounts are safe for safely keeping unused and surplus funds.
- They also provide interests on the balance though these interest rates are not that high. These interest rates may range from 3% to 5% in best cases with various terms and conditions.
- They provide easy access to the internet and mobile banking with accessibility to UPI based payment interfaces.
- They also allow you to conveniently borrow money using ATM cards spread across the country.
- If you maintain the quarterly balance on these accounts, many banks tend to offer discounts on the locker rental facilities also.
- Most banks also offer their savings account holders attractive personal and medical insurance covers.
Fixed Deposits
Fixed deposits are considered one of the most important and sought-after investment instruments in India. For years, FDs have been the first choice for people who try to park large sums for a longer tenure to receive guaranteed returns. They become lucrative because the customers tend to receive the same return after their tenure ends even when interest rates see considerable ups and downs. On the other hand, consumers also earn interest on the deposited amount which in turn helps accumulate a big amount at the time of return.
So, FDs can be understood as instruments where people invest a certain amount of money for a fixed period at a predetermined rate of interest. However, the rate of interest varies considerably from one bank and Non-Banking Financial Institutions (NBFCs) to other. These deposits are available for different periods from 7-14 days to even 10 years. Therefore, Fixed deposits are called Term Deposits at various Banks and NBFCs.
Types of Fixed Deposits
There are various types of Fixed Deposits such as:
- Standard Term Deposits
These are the standard fixed deposit schemes where you invest a certain amount for a fixed period. These deposits are made at a predetermined interest rate and can range from a lowly period of 7 days to even decades. Here, the rate of interest can vary on the duration of investment as well as on the financial institution.
- Senior Citizen Fixed Deposits
This fixed deposit scheme interests a lot of senior citizens when they retire and have to park their retirement corpus for a better return in a period defined by them. These FDs are meant for citizens above the age of 60 years. In these fixed deposits, banks offer higher interests as compared to other investors. They also provide additional tax benefits as they do not have to worry about the Tax deduction at the source. So, it reduces the overall tax burden and increases returns.
- Tax Saving Fixed Deposit
These are the tax-saving Fixed deposits that are eligible for tax deductions. The principal amount of up to Rs.1.5 lakh per annum is tax-deductible under section 80C of the Income Tax Act. These kinds of FDs have a maturity period of 5 years.
Apart from these fixed deposit schemes, other types of FDs are recurring deposits, flexible fixed deposits, fixed deposits for non-residential Indians, and Corporate Fixed deposits.
Corporate Fixed deposits.
Corporate Fixed Deposits are basically, one of the important capital-raising tools for companies. Just like the banks accept a particular amount for a fixed period at a fixed interest rate, the Financial and Non-Banking financial companies (NBFCs) accept deposits for a fixed period at a fixed rate of interest. The investment period of these deposits ranges anywhere between 1 to 5 years. One of the prime reasons for investing in Corporate FDs is also its interest rate which is generally 0.5% to 8% higher than the interest rate of the Bank FDs.
India’s largest public sector bank, the State bank of India is currently offering an interest rate of 5.3% per annum for a fixed deposit of 3 years to 5 years tenure. Meanwhile, one of the leading NBFCs in India, Bajaj Finance is currently providing an interest rate of 6.5% per annum for a similar tenure.
All Indian citizens and NRIs above the age of 18 can invest in Corporate FDs. Minors also can invest through a major guardian. Senior citizens above the age of 60 are offered special interest rates which are usually 25-30 points higher than the normal rates.
Reasons or benefits of investing in Corporate FD:
- The interest rate is higher compared to regular Bank Fixed Deposits.
- Systematic Interest payment options (Monthly, quarterly, half-yearly, annually)
- Most of the Fixed Deposits are rated by credit rating agencies so that the investor can choose wisely.
Benefits of Fixed Deposits
Some of the benefits of fixed deposits are:
- Assured Return: Fixed deposits provide an assured return on investment unlike other forms of investments such as securities which depend on the market volatility conditions and may also result in loss. Here, your principal amount remains secured and returns are higher.
- Benefits of Compounding: Apart from an assured return, consumers also receive higher returns due to the benefits of compounding due to faster multiplication of money.
- Minimum Investment assured: Even if you do not have a large sum of money to park in FDs, you can even start with a low sum of Rs.500 to get into the habit of investment. There are FD schemes that allow monthly or periodic deposits of money to keep the flow going.
- Liquidity: Although you will lose some money in the form of penalties, you can withdraw money at any point in time. So, FDs provide you with the option of liquidity whenever you have the crunch of money and during emergencies making it a customer-friendly scheme.
- Hassle-free process: Most FDs schemes are easy to apply with different banks also offering Fixed deposits through net banking and even UPIs.
- Higher rate of interest for senior citizens: FDs have been attracting senior citizen investors over time due to their higher rate of interest for senior citizens so that they can remain tension free in their retired life.
Savings Accounts vs Fixed Deposits: Which one should you choose?
Before starting the comparison, it is important to understand that if your primary goal for investment is ‘Wealth Creation’, then neither a fixed deposit nor a saving account will be able to help you achieve your goal. A saving account should only be used to manage your essential banking transactions and keep a basic saving amount for immediate expenses. And fixed deposits should only be used by extremely conservative investors to save the extra money for the short term as an emergency fund. For long-term wealth creation, you must opt for better investment options like equity and mutual funds, based on your risk appetite.
Also Read: Mutual Fund Vs Fixed Deposits
Coming back to the comparison between Savings accounts & Fixed deposits, let’s understand which option you should choose between these two.
Before we delve into understanding the right option, we must understand that most people use fixed deposits only when a large sum of money is involved. In cases when someone retires, they tend to deposit their retirement corpus into fixed deposits to gain control over their retired lives. However, they would also have a savings account with them to keep the liquidity needs in check.
But then keeping all the money in the bank does not make sense. If it remains in the bank, there is an unintended temptation to use it in one way or other. Going by this mentality, people generally park the additional and surplus funds into fixed deposits. While both fixed deposits and saving accounts are excellent instruments providing stability and security, people tend to use fixed deposits schemes more. Here is the reason why?
Higher Rate of Interests
Fixed Deposits have a history of offering a higher rate of interest on the investment. This compounded facility helps a consumer receive better returns after maturity. Compared to saving accounts, fixed deposits have greater short-term and long-term returns also. This interest rate can range from 5% to 7.50% depending upon different banks and NBFCs. Therefore, people concerned with higher rates of interest always choose Fixed deposits over saving accounts.
Assured Returns
As conveyed earlier, fixed deposits offer assured returns on investment irrespective of market conditions or volatility. Their rate of interest is predetermined by the banks and calculating on the basis of that provides a fixed amount that can be received after the term ends.
The higher interest rate for Senior Citizens
FDs have been the first priority for senior citizens to park their retirement surplus amount in a safe environment. But this choice also gets complimented with the fact that senior citizens receive higher interest rates on FDs. However, these higher returns offered often vary from bank to bank. On the other hand, returns offered on saving accounts differ as well but they offer similar rates to everyone irrespective of their age. So, in a way, fixed deposits benefit senior citizens with higher interests and this is where fixed deposits edge past the savings accounts.
Here, senior citizens are offered higher rates to the tune of 0.25% to 2% per annum higher than that of a savings account.
Periodic Interest Payouts
Fixed deposits also offer periodic interest payouts to consumers to help them plan their expenses as per their choices. For people who have retired, these periodic interest payouts act as a monthly source of income to meet general expenses. FDs provide consumers with the option of investing in non-cumulative FDs if they want regular interest payouts on a monthly, quarterly, semi-annual, and annual basis. Or, you can even opt for total interest payout as part of the maturity payout as well. This facility is unique only to FDs and cannot be found in the saving accounts schemes.
These periodic interest payouts act as the major reason why people invest large sums as FDs because while the principal amount remains secured, they also get a smaller amount per month as a regular payout.
Better saving instruments
FDs act as better saving instruments as they have fixed lock-in periods that limit withdrawals until maturity. Though you can always break the FDs, you cannot just go and get the money whenever you feel like it. Therefore, it limits the temptations that might arise to take out money if they are easily withdrawable from ATMs.
From the point of view of investment, this lock-in allows a consumer to save more and limit their excess expenses. So, now that you leave your money for a longer period, you get larger earnings due to the compounding effect.
Flexibility
Fixed deposits are flexible investments. You can enter into fixed deposits for a certain time period. You can also get multiple tenure options which might range from 7 days to 1 year to even 10 years. The offered tenure may vary from bank to bank but every bank offers greater interests in that period. So, you can always go ahead and get a fixed deposit in any bank which offers great FD interest rates.
In a long list of benefits, these are some of the reasons why fixed deposits are preferable especially in the middle class who look for a recurring payment option combined with a higher rate of interest. FDs provide a retiring professional with much security as far as their money is concerned and assure them of a great retiring life.
So, let us just sum up the major differences between a saving account vs bank fixed deposits from the following table:
| Features | Fixed Deposits | Savings Accounts | Inferences |
| Flexibility of Tenures | Flexible tenures starting from 7 days to 1 year to even 10 years | No flexible tenures are allowed | FDs are better in terms of flexibility |
| Interest Calculation | Quarterly | Daily | FDs have a Higher Rate of Interest when calculated quarterly |
| Loan Facility | Can be availed against FD | No such facility | Most people tend to use this facility to obtain loans against FDs |
| Rate of Interest | Varies according to the age of the holder, Senior citizens receive a higher rate of interest than regular FDs | No such facility is available for senior citizens. ROI is available at the market rate for everyone | FDs are preferable in this case |
| Withdrawal Limit | The full amount can be withdrawn post maturity. However, FDs can be liquidated in times of emergency | Large sums are always available but some banks have a lower limit on balance | Not comparable |
| Tax Exemption | Deductions are available under 80C of the IT Act. It is available only for a tax saver bank FD having a 5 year lock-in period | Tax exemption not available | In this case, FDs are highly used |
A saving account is a necessity in modern times given how engulfed banking has become these days. For transparent online transactions, you need a savings account but can you use it for wealth creation? Can saving accounts open a door to the future for investors?
Definitely not. Keeping in mind the extremely low rate of return along with maintenance charges, a saving account can never be considered a good investment option for long-term wealth creation. On the other hand, though the FDs are generally used by conservative investors as a means of investment and earning interest, ideally FDs should only be used as a short-term investment mode to maintain liquidity. While investing in equity and mutual funds is always a better option for long-term wealth creation, conservative investors who prefer to invest in bank FDs should definitely consider investing in Corporate FDs to get better returns.
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