Fixed deposit refers to an investment plan where the sum of money is invested in a Non-Banking Financial Company (NBFC) or with other lenders for a particular tenure along with a specified interest rate. Fixed deposit is one of the safest forms of investment and one of the most common one. The popularity of fixed deposit is a result of low risks involved. Stocks, on the contrary, refer to ownership of shares in a company or a business.
When deciding, whether fixed deposits or stocks, as to determine which is the better option, there are several pros and cons that we need to go through of each in order to evaluate which one is more beneficial. Apart from the advantages and drawbacks that these investment avenues offer, it is essential to know that there are several components that have to be taken into consideration too, one of which is age.
Fixed Deposit is offered by Non-Banking Financial Companies (NBFCs) and other financial institutions which help in safeguarding future by securing a bulk amount deposited by an investor. Stocks, on the contrary, are more focused on profit making, thus are more engaging and risky.
Here is the comparison between FDs and Stocks to help you decide your desired option for investment:
- Risk: FD is the safest form of investment, Fixed Deposits involve very less risk and your investment increases at a steady rate as it is not affected by the market condition. Stocks, on the contrary, are subject to market risk. Thus, when individuals talk about risks, know that stocks carry the highest amount of risks.
- Assurance: In the Fixed Deposit, the tenure is preset. Thus, this makes a fixed deposit a locked asset which cannot be broken unless the maturity period is reached. Stocks, on the other hand, are not locked, a person can sell stocks any time he wishes to do so. However, the assurance of returns depends upon the time and knowledge in investment.
- Tax benefits: Fixed Deposit is subject to tax benefits. If you choose to invest in Fixed Deposits then you can save your money. However, it is important to know that FDs are not entirely exempted from tax payments. Stocks, on the other hand, yield tax-free dividend. This is, thus, a good way to generate secondary income.
- Earnings: Fixed Deposit might be the safest form of investment but one cannot say a lot when it comes to earnings. Stocks are well known for their returns. They offer way higher returns than most of the investment options. An investor with sufficient knowledge about stocks can reap up to 12-20% returns.
- Inflation: When making an investment it is essential that inflation is considered. Last year, the inflation rate was 4.97%. It prevents your investment from growing. FDs are not really beneficial when it comes to tackling inflation. However, stocks help you to beat the inflation, as you invest when the price is low and cash-in on it when the price is at the highest.
- Liquidity: When referring to liquidity, it takes into account the flexibility offered in investments. FDs do not offer a high liquidity, primarily, because you cannot break it until it reaches maturity period. However, that is not the case with stocks.
These are few of the points that you need to consider when you are looking to invest in either fixed deposits or stocks. Both have their own benefits and drawbacks, thus, evaluation has to be done by you. FDs, however, are a preferred option because the interest rates have been revised and they are risk-free.