Fixed Deposit: Short-Term vs Long-Term, Which is Better?

Fixed deposits are a popular financial savings product that offer assured returns at competitive interest rates. Whether you want to save for an upcoming holiday or for your child's school a decade from now, Fixed Deposits are a reliable way to achieve your financial goals. But deciding between short or long-term FDs is confusing but important as they directly impact your return.

What is a Short-Term Fixed Deposit?

A short-term FD is a deposit fixed for a shorter period, ranging from 7 days to one year which offers a higher interest rate than a basic savings account. If you have excess funds you do not need immediately but expect to spend in the following several months, a short-term fixed deposit is the ideal option. It will earn more interest than money simply stored in your Savings Account.

ALSO READ: https://stablemoney.in/investments/fixed-deposit-vs-time-deposit

What is a Long-Term Fixed Deposit?

A long-term fixed deposit is a deposit in which funds are locked for a longer period say one year to ten years offering higher interest rate than short-term FDs. These FDs pay a much higher interest rate than a savings account or a short-term FD and are best for long-term goals like retirement, child education or marriage, etc. While stock instruments entice investors with potentially larger profits, they also have an inherent high risk factor. As a result, fixed deposits are a safer option, delivering decent returns with less risk.

Long-term FDs are much more secure than other equity-related securities as they are safe and don’t have any market risks.

What to Choose, Short-Term or Long-Term FD for Financial Planning?

When deciding between long-term and short-term investments, you can choose both to maximise return. A mix of both is a wise investing strategy that includes a combination of the two in your portfolio.

Example: If you have ₹5 lakh and want to invest it but keep 1 lakh as liquid for some expense in the upcoming 6 months, you can invest 1 lakh in a 6-month short-term FD. The remaining four lakhs can be invested in a long-term FD for 5-10 years.

You can also consider investing remaining Rs 4 lakh in four different FDs for Rs 1 lakh each with different tenure providing greater flexibility and possible returns on your Investment.

One of the major differences between shorter or longer term FDs is its time frame. When choosing between them consider when you need money if you don’t need it for longer time you can choose longer tenure otherwise choose short-term FD.

Example, If you make a five-year fixed deposit. After three months, you'll need money to purchase a gift for a family member. You may have to break your FD and lose out on possible interest. Similarly, if you construct a 6-month FD and do not need the funds after maturity, you will miss out on the greater interest rates offered by long-term FDs. As a result, a well-balanced plan is important for aligning your investment decisions with your investment horizon.

Regardless of your preference, you can easily open both FDs online and use features such as auto-renewal or premature closure as needed.

ALSO READ: https://stablemoney.in/blog/fd-vs-mutual-funds

Conclusion

Both short-term and long-term FDs are excellent choices for a safe and consistent investment with guaranteed returns. If you need the money right away or expect interest rates to rise soon, go with a short-term fixed deposit. If you don't need the money right now or expect interest rates to fall, opt for a long-term fixed deposit.