Fixed Deposits (FDs) are a popular investment choice for individuals seeking stable returns while minimising exposure to market volatility. Among the various types available, two common categories that one can often think about are linked fixed deposits and normal fixed deposits. Linked fixed deposits combine the benefits of fixed deposits with the liquidity of savings accounts, allowing for easy access to funds while earning higher interest rates.
In contrast, normal fixed deposits offer fixed returns over a set tenure but with limited liquidity. This article explores the features, benefits, and differences between these two options, helping you make an informed financial decision that suits your needs.
Basic Understanding of Fixed Deposits
Fixed deposits are a type of investment offered by financial institutions, including banks and Non-banking Financial Companies (NBFCs). When you invest in an FD, you deposit a lump sum amount for a fixed tenure at a predetermined interest rate. You receive your principal amount and the accumulated interest at the end of the tenure.
What Is a Normal Fixed Deposit?
A normal fixed deposit is the traditional form of FD where you deposit a certain amount for a specified period, usually from a few months to several years. Here are some key characteristics:
- Fixed Interest Rate: The interest rate is fixed at the time of investment and remains unchanged throughout the tenure.
- Maturity Amount: At maturity, you receive the principal amount plus interest, which may be compounded annually or paid out periodically, depending on the scheme.
- Limited Liquidity: Generally, funds are locked in until maturity, and premature withdrawals usually incur penalties.
What Is a Linked Fixed Deposit?
On the other hand, a linked fixed deposit combines the features of a traditional fixed deposit with the liquidity of a savings account. Here’s how it works:
- Hybrid Account: This type of FD links a savings account to a fixed deposit, allowing you to earn higher interest rates while retaining some access to your funds.
- Interest Accumulation: The interest rate on a linked FD is usually higher than that of a normal savings account, making it an attractive option for those looking to grow their savings.
- High Liquidity: You can withdraw funds from the linked savings account as needed, providing greater financial flexibility.
Feature Comparison: Linked vs. Normal FDs
In this section, we shall compare the features of Linked FD and Normal FD to understand the differences in more depth:
| Feature | Normal Fixed Deposit | Linked Fixed Deposit |
| Liquidity | Limited as the funds are locked in | Higher liquidity due to linkage with savings account |
| Withdrawal Options | Premature withdrawal penalties may apply | You can usually withdraw from a linked savings account |
| Ideal For | Long-term Savers | Those needing flex liquidity |
Benefits of Normal Fixed Deposits
The following are key benefits of normal fixed deposits:
1. Stability
Normal fixed deposits provide consistent returns, making them an ideal choice for those who prioritize stability over high-risk, high-reward investments. The principal amount remains intact throughout the investment term, offering investors confidence in their financial decisions.
2. Predictable Returns
Fixed deposits come with predetermined interest rates, allowing investors to calculate returns in advance. This feature makes them highly reliable for planning future expenses or achieving financial milestones. With almost no risk of market fluctuations affecting returns, FDs are a dependable choice for those seeking consistent and predictable growth for their savings.
3. Flexibility in Tenures
Normal fixed deposits offer a wide range of tenure options, ranging from a few months to several years. This flexibility allows individuals to align their investments with specific financial goals, such as short-term liquidity needs or long-term wealth creation, ensuring the investment suits their unique financial requirements.
Benefits of Linked Fixed Deposits
The following are vital benefits of linked fixed deposits:
1. Access to Funds
Linked fixed deposits offer enhanced liquidity, enabling easy access to funds when needed. Unlike traditional fixed deposits, partial withdrawals are possible without significant penalties, making them a practical choice for those looking for flexible withdrawal options.
2. Higher Interest Earnings
These deposits typically provide better interest rates compared to regular savings accounts. By linking your savings account with a fixed deposit, you can earn higher returns on surplus funds, ensuring more effective growth of your money while keeping it accessible for day-to-day needs.
3. Automatic Sweep-In/Out
A standout feature of linked FDs is the automatic transfer of excess balances from a savings account into a fixed deposit. This ensures that funds above a specified threshold earn higher interest. Withdrawals below the threshold seamlessly revert funds to the savings account, maintaining liquidity and maximising earnings.
How to Choose Between Linked and Normal Fixed Deposits
When deciding between a linked fixed deposit and a normal fixed deposit, consider the following factors:
1. Financial Goals
A standard fixed deposit might be suitable if you want to save for a long-term goal without immediate access to your funds. Conversely, if you value flexibility and want to earn better interest on your savings, a linked fixed deposit could be the right choice.
2. Liquidity Requirements
Evaluate your liquidity needs. A linked FD provides flexibility if you anticipate needing access to some of your funds during the tenure.
3. Interest Rates
Compare the interest rates offered by both options. While linked FDs often provide better returns compared to savings accounts, ensure the rates align with your expectations.
Conclusion
Linked and normal fixed deposits play a vital role in personal finance. While normal fixed deposits provide stability and predictable returns, linked fixed deposits combine higher interest rates with the convenience of a savings account.
Choosing the right type of fixed deposit depends on your financial objectives and liquidity needs. With institutions like Shriram Finance offering competitive and flexible fixed deposit options, investors can make informed choices that align with their goals while enjoying secure and reliable growth opportunities.
