Why is Fixed Deposit gaining popularity?

In India, over a quarter of households prefer fixed deposits over everything else when it comes to savings or investing, and only a few of them are comfortable with the capital market (be it mutual funds or stocks).

Usually, in India, when it comes to the priority of investment instruments, insurance plans, real estate, and gold are the preferred investment instruments in the order of preference after fixed deposits.

Current investment instruments such as mutual funds do not have a spot in India’s top five investment priorities, and equities are also put after mutual funds for that matter.

If we talk geographically, rural households remain ignorant of the mutual funds, and their participation level remains dismal.

Contents

Availability of credit

You also get the versatility to take credit for the same when investing in FD. Credit instruments such as – credit cards, overdrafts, loan against FD are some of the items provided by banks.

The overdraft facility offers loans greater than the FD amount for credit cards and loans against FD, while loans from 85 percent to 100 per cent of the FD amount are provided to you.

If you invest in mutual funds or stocks for that matter, on the other hand, you usually do not get loans because all banks do not regard these as protection.

Security

In India, with some degree of risk involved, the middle-income community appears to look for assurance rather than capital appreciation. Thus, despite low returns, people opt for fixed deposits with best interest rate.

Although liquid funds give slightly higher rates with a degree of uncertainty comparable to FDs, people seem to have a mentality that there is a higher degree of risk for all types of funds (whether liquid or debt or equity).

Easy entry and exit

Usually, it takes just a day to open a fixed deposit or any other deposit for that matter. Similarly, it hardly takes a day’s time to get money at the moment of maturity or even pre-maturity (on request).

In the case of mutual funds, on the other hand, it takes almost two days to receive the allotment at the time of the investment or to receive the balance credited to the bank account at the time of the redemption.

Also, if mutual funds are exited before one year, there is an exit load that is paid which is not the case for FDs. Thus, FDs get an advantage over MFs in case of an emergency

The traditional way of investing

India has remained a nation impoverished. This argument may not be correct now, but two-three decades ago, financial planning was conducted, taking into account income and expenditures and net income and savings.

The savings culture was not widespread, and after covering expenditures in jewellery and fixed deposits, people used to save the leftover money. Savings have never been treated as a required monthly expenditure.