In this comprehensive guide, we’ll explore the disparities between these accounts while highlighting the importance of factors such as fixed deposit returns and utilising tools like the FD interest calculator to make informed decisions.
Savings Account
A savings account is a straightforward financial tool that allows you to deposit funds and earn modest interest rates. It is a secure repository for your money while providing easy access to your funds.
Available at both banks and non-banking financial institutions, opening a savings account requires minimal funds and offers convenient access to your money.
The primary advantage of a savings account is its ability to keep your funds separate from everyday spending, thanks to its liquidity, reliability, and security. It’s ideal for storing emergency funds or saving for short-term goals like vacations or home maintenance.
Fixed Deposit Account
A fixed deposit (FD) is an investment product financial institutions provide. It involves depositing a certain amount of money for a predetermined period to earn a fixed rate of interest.
This interest rate generally exceeds that of savings accounts. Fixed deposits are available for various durations, ranging from 7 days to 10 years.
As a fundamental investment option, fixed deposits offer higher interest rates compared to savings accounts, making them suitable for saving towards long-term goals or retirement.
Savings Account: Pros And Cons
Advantages of savings account
High Liquidity: Savings accounts enable easy access to funds, allowing withdrawals at any time. This makes them suitable for storing emergency funds or funds needed for immediate expenses.
Wide Availability: Savings accounts are offered by banks and non-banking institutions nationwide, making them easily accessible to individuals.
Low Initial Deposit: Setting up a savings account generally requires a small initial deposit, making it accessible to individuals with limited funds.
Disadvantages of a savings account
Low-Interest Rates: Savings accounts offer minimal interest rates, which may not effectively combat inflation and potentially reduce the true value of savings over time.
Minimum Balance Requirements: Many savings accounts have minimum balance requirements, and falling below this threshold may result in penalties, offsetting any interest earned
Fixed Deposit Account: Pros And Cons
Advantages of a fixed deposit account
Flexibility in Term:
Fixed deposit account offer flexibility in investment tenure, ranging from short periods to as long as 10 years. Longer terms often yield higher interest rates, providing options for different financial goals.
Guaranteed Returns: Unlike equities, fixed deposits offer assured returns upon maturity. This predictability is beneficial for those seeking stable returns and planning for future financial needs.
Tax Benefits: Interest earned on fixed deposit accounts is typically tax-free, making them a tax-efficient investment avenue for individuals looking to minimise their tax liabilities on their earnings.
Disadvantages of a fixed deposit account
Limited Accessibility to Funds: One drawback of fixed deposit accounts is the restricted access to funds until the maturity period expires. Early withdrawal may incur penalties or reduced fixed deposit returns, potentially compromising liquidity in unforeseen circumstances.
How Are Savings and Fixed Deposit Accounts Different?
Investor Objective
FD: The primary aim is to maximise interest earnings over extended investment durations.
Savings: The primary aim is to keep funds safe and transaction-ready.
Investment Tenure
FD: Account holders have the flexibility to select the tenure of the fixed deposit, which can span from 7 days to 10 years.
Savings: There is no such tenure here.
Interest Rate
FD: Fixed deposits generally offer a high rate of interest.
Savings: Saving accounts usually offer a lower rate of interest.
Limit of withdrawal
FD: Fixed deposit withdrawals are available upon the completion of the designated tenure.
Savings: Account holders have the freedom to withdraw funds as long as they meet the minimum balance requirement.
Loans: Fixed deposit accounts can serve as collateral for loans.
Savings: Saving accounts typically do not offer loans.
Tax Breaks
FD: Fixed deposits with tenures of five years or more are eligible for tax breaks under the Income Tax Act, Section 80C.
Savings: Saving account holders do not receive any tax benefits.
Liquidity
FD: Fixed deposit accounts have limited liquidity due to their lock-in period.
Savings: Saving accounts offer high liquidity as accountholders have immediate access to their funds at any given time.
Deposit Proof
FD: The account holder is provided with a fixed deposit receipt.
Savings: Account holders are provided with passbooks that require regular updating.
To Conclude
By leveraging tools like the FD interest calculator and understanding the nuances between savings and fixed deposit accounts, you can make informed decisions to optimise your savings and investments for a secure financial future.
Savings accounts and fixed deposit accounts serve as valuable tools for managing finances and achieving financial goals. While savings accounts offer liquidity and convenience for everyday banking needs, fixed deposit accounts provide higher returns and capital preservation for individuals willing to lock in their funds for a predetermined period.
Understanding the differences between these two financial instruments is essential for making informed decisions about where to allocate savings and optimise returns based on individual financial objectives and risk tolerance.
