How to Choose the Right Tenure for Your Fixed Deposit?
5 min read | 5 months ago
Fixed deposits are among the most common investments in India. They are low in risk, promise a return on investment and are relatively uncomplicated to comprehend. However, while you are definitely on the right track if you wish to make an investment in an FD, have you wondered about the right tenure for the same? The tenure matters immensely, since different FD terms may be suitable for varying goals and purposes. So, let’s have a look at the tenure choices that you have along with helping you choose the right one for your needs.
Importance of Interest Rates
One of the reasons that accounts for the huge popularity of fixed deposits is the interest rate provided for them. The higher the interest rate, the more you earn on your investment. Hence, you must know how interest rates are computed on fixed deposits. It will help you have a better understanding while finding an investment alternative.
Understanding the Tenure Options
FDs come with multiple tenure options that range from a few days to several years; the commonest ones usually include the following:4
- 7 days
- 14 days
- 1 month
- 3 months
- 6 months
- 1 year
- 2 years
- 3 years
- 5 years
- 10 years
The interest rates available from banks and financial institutions vary as per the tenure of your fixed deposit.
Short-Term Tenure
The tenure for short-term fixed deposits is less than 1 year. These are lucrative if you want to withdraw the amount after a short period to meet specific goals. These deposits, thus come with higher liquidity although the interest rates, while competitive, are lower than long-term deposits. So, if you are looking to grow your wealth for the long haul, then these tenures are not what you should opt for.
Long-Term Tenure
Long-term fixed deposits are those with tenures that are more than a year. If you’re looking to invest over a longer duration to meet particular financial goals, then these are undoubtedly your best options. The rates of interest are also higher than short-term deposits along with the lock-in period is longer and may affect liquidity. Yet, the final rewards are sure to be worth it, if the amount you accumulate is sufficient to help you fulfill any particular objective.
Factors to Consider While Choosing the Tenure
Now that you have an idea of the tenure options, how do you choose the right one for your needs? Here’s a guide that may help.
1. Interest Rates
The interest rates offered on fixed deposits vary depending on the tenure. Shortterm fixed deposits offer lower interest rates, while long-term fixed deposits offer higher rates in comparison. Generally, the interest rates range from 4.5% to 9.00%, and senior citizen FD rates range from 4.5% to 9.50%, as offered by Unity Small Finance Bank, to cite an example.
2. Inflation
Inflation is one of the most important factors that you should consider while choosing the tenure for your fixed deposit. Inflation reduces the value of money over time. If the inflation rate is higher than the interest rate offered on your fixed deposit, you may end up losing money. You should choose a tenure that offers an interest rate higher than the inflation rate.
3. Financial Goals
Your financial goals play a crucial role in choosing the tenure for your fixed deposit. If you have short-term financial goals, then a short-term FD is the best choice. A longer tenure, on the other hand, is better if you wish to fulfill specific objectives after a sustained period of time. You should also consider the amount you want to invest and the returns you expect from your investment.
Steps to Choose the Right Tenure
Choosing the right tenure for your fixed deposit requires planning and research. Here are a few steps that you can follow to choose the right tenure:
1. Assess Your Financial Goals
Assess your financial goals and determine the amount you want to invest and the returns you expect from your investment.
2. Research the Interest Rates
Research the interest rates offered by banks and financial institutions for different tenure options. Compare the interest rates and choose the one that suits your financial goals.
3. Consider the Inflation Rate
Consider the inflation rate and choose a tenure that offers an interest rate higher than the inflation rate.
4. Evaluate the Liquidity Options
Evaluate the liquidity options offered by different tenure options. If you require quick access to your funds, choose a short-term fixed deposit.
5. Plan Your Investment
Plan your investment and choose the tenure that aligns with your financial goals.
Conclusion
Hence, as you can see, it is imperative that you select the right tenure for your FD. It is correlated to interest rates and the amount that you wish to invest. Getting it right is crucial to align your investment with your financial needs and circumstances.
FAQs
1. How do I choose the right tenure for my fixed deposit?
The right tenure for your fixed deposit depends on your financial goals, time horizon, and risk appetite. Longer tenures generally offer higher interest rates but may not be suitable for short-term goals.
2. What are the benefits of a longer tenure fixed deposit?
A longer-tenure fixed deposit offers higher interest rates, which can help you earn more returns on your investment. Additionally, it provides a stable source of income and can be used as collateral for loans.
3. Can I withdraw my fixed deposit before maturity if I choose a longer tenure?
Yes, you can withdraw your fixed deposit before maturity, but you may incur a penalty of as much as 1%.
About Unity Small Finance Bank
Unity Small Finance Bank is committed to making banking simpler and more accessible for everyone. Our services include Savings Account, NRI account, Current Account, Fixed Deposits, and Personal Loans offering flexible tenures and attractive interest rates. We also offer financing options like MSME Loans and Microfinance to support businesses and underserved communities. Learn more about Unity Small Finance Bank here.
Related Blogs
How are Interest Rates Calculated on Fixed Deposits - A Guide
Understanding Different Types of Fixed Deposits - Unity Bank
Know More About the FD Eligibility Criteria, Minimum Amounts and Other Aspects
What is an overdraft against FD?
