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Short Term FD vs Long Term FD: A Detailed Guide for Investors
Reviewed by: Fibe Research Team
- Published on: 14 Nov 2024
Reviewed by: Fibe Research Team
Long-term fixed deposits and short-term FDs can act as catalysts to build wealth. Understanding their unique value will help you choose the ideal saving scheme based on your goals. Both options offer safety and assured returns as your investment is secure from the impact of market forces. You get a fixed rate of return, which stays the same from the day you book your deposit until your investment matures.
The name itself suggests that it has a shorter FD time period. You can invest for 7 days and it can go up to a year. You can get these advantages from short-term FDs.
This is a great option to work on your short-term fiscal aims. Rather than having your savings sitting idle in your savings account, investing in short-term FD gives you better returns.
The lock-in period is shorter so that you can have better liquidity. Investing for 7 days or a month can help you benefit from interest gains without causing financial strain.
The interest rates on your fixed deposit are higher than that of a savings account. So, you can earn more with FDs from the same bank. This is why investing in short-term fixed deposits is a better option to increase your savings.
These have an extended fixed deposit time period starting from a year and going up to 10 years. Long-term fixed deposits may offer higher interest rates, making them very efficient for building long-term wealth if your risk appetite is low.
These are some long-term fixed deposit benefits you can count on:
Long-term fixed deposits help you compound your savings for long-term goals like your child’s wedding, retirement or buying a home.
The interest rates are usually higher than those on short-term FDs. Moreover, it is a great way to work on your long-term goal with much risk exposure.
By investing in a 5-year fixed deposit, you can enjoy the benefits of Section 80C of the IT Act. This helps you save on taxes.
A long-term FD helps you get a loan or a credit card using your investment as a security. Your FD continues to generate interest and you can get easy access to credit. This can help you build a credit score or address emergencies without hassles.
Also Read: What is Fixed Deposit?
To better understand how you can utilise your short-term and long-term FDs, see the table below:
| Factors | Short-Term FD | Long-Term FD |
|---|---|---|
| Investment Tenure | 7 days up to 1 year | 1 year up to 10 years |
| Interest Rates | Higher than your savings account | Higher than short-term FD interest rates in most cases |
| Purpose | To achieve short-term financial goals | To work towards your long-term goals |
| Liquidity | Handy access since the tenure is shorter | Liquidity is limited but you can use the premature withdrawal option |
| Wealth Accumulation | It is better than funds lying idle but may not generate high payouts | It is best for building long-term wealth but be sure to take taxes and inflation into account |
Something to keep in mind when booking a long-term FD is that if interest rates increase in the future, you may not be able to access its benefits. In addition, both types of FD income are taxable as per your slab and TDS is deducted when the payout crosses ₹40,000/₹50,000 for regular/senior investors.
Keeping these factors in mind, you can book long-term and short-term FDs. No matter which one you choose, FDs have a lock-in period and it is not wise to withdraw your investment prematurely. If you require instant cash, apply for a Fibe Instant Personal Loan.
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No, there aren’t any tax savings you can get on short-term FDs. Only 5-year FDs qualify for tax exemptions under Section 80C.
FDs don’t require you to pay any interest. You invest the amount and the bank or NBFC will pay the interest either at regular intervals or after the FD matures.
FDs are generally safer investments and you can check the bank or NBFC’s credit rating to ensure you get your invested corpus and interest on time. That being said, booking a long-term FD means you cannot benefit from an increase in the interest rate of FDs during the tenure. Short-term FDs help you avoid this and offer more stability since the FD matures sooner.
When you book an FD with a bank, your investment is covered up to ₹5 lakh by the DIGC. If your investment or returns cross this amount, then you stand to lose your money.
You certainly can take a loan against your FD. Check the bank or NBFC’s policy for this. The interest you pay is slightly higher than the FD interest rate. The loan amount may be 70-80% of the FD amount.
