Fixed Deposits (FDs) have long been a cornerstone of conservative investing in India, offering a blend of reliability and predictable returns. However, as financial products evolve to meet diverse investor needs, two distinct types of FDs have gained prominence: Short-Term Fixed Deposits and Flexi Fixed Deposits. Each caters to different financial goals and liquidity requirements, presenting investors with a choice that can significantly impact their financial strategy.
Here, we will explain the features and benefits of short-term and flexi-fixed deposits to help you decide which one best suits your needs.
Understanding Short-Term Fixed Deposits
A short-term fixed deposit is a scheme which offers investors the chance to place their funds for a duration that is relatively short compared with other forms of fixed deposit schemes, usually within the range of 7 days to 12 months. These deposits have become very popular among those looking to park funds temporarily and still earn a stable return.
Features and Benefits of Short-Term Fixed Deposits
- Fixed Tenure: Most financial institutions offer short-term FDs with tenures between 7 days and 1 year. The duration of the funds to be locked up can be chosen accordingly.
- Reliable Returns: Since the interest rate is fixed, the returns will be reliable at the agreed-upon maturity date.
- Rate of Interest: The short-term FD has a fixed rate of interest on deposit with the financial institution and remains the same during the tenure. Thus, the return is always predictable.
- Low Risk: As the principal amount is never exposed to any market risk, short-term FDs are completely risk-free, and your capital is absolutely protected.
- Liquidity: Short-term FDs are not as liquid as savings accounts, but they offer relatively quicker access to funds than long-term FDs, in case you want to break them.
- Premature Withdrawal: It is permitted but has penalties in the form of low interest rates or charges.
- Investment Amount: One of the advantages of a short-term FD is that one can invest small amounts.
- Suitable for Short-term Goals: If you save up for a near-term expense like going on vacation or making a big purchase, then the short-term FDs will help grow your money while still keeping it accessible in case it's needed in the near future.
Understanding Flexi Fixed Deposits
Flexi fixed deposits are a hybrid solution, combining the reliability and returns of a fixed deposit with the flexibility of a savings account. They are tied to your savings or current account, allowing you to earn a higher interest rate on surplus funds without forgoing liquidity. Understanding the features & benefits of flexible fixed deposits in the next section will help you determine whether they are a suitable form of investment for you.
Features and Benefits of Flexi Fixed Deposits
- Connected Savings/Current Account: Flexi FDs are tied to a savings or current account, where surplus funds over an established limit are automatically transferred into a fixed deposit.
- Part Withdrawal: Fund withdrawal is possible from the linked FD as and when needed. You need not break the entire deposit, and interest continues to accrue on the remaining amount.
- Dynamic Interest: The money in your savings account is still earning regular savings interest. But the money that finds its way into the FD earns a better rate of fixed deposit interest.
- Auto-Sweep Facility: The Flexi FD uses an auto-sweep facility. That means money will automatically be swept out of your savings account into the FD and vice versa, based on a predetermined threshold that you have set.
- Liquidity: Unlike conventional FDs, the Flexi FD allows you to withdraw money without having to break the whole deposit. This makes it a great option for anyone who at least requires access to funds quickly but still earns returns on par with their FD.
- Flexible Tenure: You get a lot of flexibility regarding how long the funds are to be locked away in the deposit.
- Better Interest on Excess Money: Any excess money in your savings account is swept over into the FD, which might earn better interest. So, your money is not sitting idle on low savings rates.
- Ideal for Emergency Needs: Flexi FDs offer liquidity for unplanned expenses without compromising the higher returns one enjoys with a fixed deposit.
How to Choose the Best Option
Let us compare short-term vs flexi FD and find out which one would be the best option by assessing different factors:
| Factor | Short-Term FD | Flexi FD |
| Returns | Fixed interest rate on the entire deposited amount | Higher interest on FD portion, lower on savings account portion |
| Investment Horizon | Ideal for a few weeks to months | Suitable for parking idle funds with occasional access needs |
| Risk Appetite | Low-risk, more predictable returns | Low risk, but potential for diluted returns with frequent withdrawals |
| Convenience | Simple management for the fixed duration without access needs | Hassle-free automatic transfers and withdrawals |
IMPORTANT NOTE: The information provided about short-term and flexi fixed deposits is for general informational purposes only and may not reflect current offerings from all financial institutions. Features, interest rates, and terms of these FD types can vary between institutions and are subject to change. While both options are generally considered low-risk, returns are not guaranteed and may not keep pace with inflation. |
Conclusion
Both short-term fixed deposits and flexi fixed deposits have different advantages that cater to different financial needs. If stability of returns within the short term is required without the need for liquidation, a short-term fixed deposit can be considered. But you might be seeking flexibility, quick access to funds, and higher interest on excess savings. In that case, a flexi fixed deposit would be a better choice. But remember to assess your financial goals to find the best investment plan for your needs.
