Long-Term Fixed Deposits (FDs)

A long-term fixed deposit (FD), a provision allied to an account created by you in which you invest for a period ranging from 5 years to 10 years or more. Banks, NBFCs, and post offices offer higher rates of interest on long-term FDs as compared to short-term FDs.

The investment you make in a long-term FD account involves minimal risks and offers assured returns. They are often perceived to be one of the most ideal means to achieve long-term financial goals.

In addition to being one of the safest investment alternatives, long term FDs promise higher risk adjusted returns in comparison to their counterpart – short term fixed deposits. This is to compensate the investors for the relatively high holding period risk borne – on account of longer tenure. In addition to being one of the safest investment alternatives, long term FDs promise higher risk adjusted returns in comparison to their counterpart – short term fixed deposits. This is to compensate the investors for the relatively high holding period risk borne – on account of longer tenure.

The following table summarises the interest rates on long term fixed deposits by major financial institutions:

Disclaimer: Interest rates are subject to change in accordance with the prevailing repo rate and the bank’s policy.

The rates mentioned in the table are as per the update received on August 8, 2022. It is prudent to note that the offered fixed deposit rate is subject to variation on account of numerous factors like the repo rate, amount deposited etc.

For instance, HDFC Bank offers a slightly higher rate of interest for deposits amounting to over 2 crores.

The interest rate offered at the time of opening of your fixed deposit account, remains constant throughout the tenure of deposit i.e the interest rate is fixed from the onset to withdrawal. The long-term deposit rates as aforementioned change from time to time, but the revised rates are applicable only to new accounts.

It is a prerequisite for investors to weigh the advantages & disadvantages of subscribing to a fixed deposit offer extended by a financial institution. We attempt to empower you to do the same through the course of the remainder of this article.

Below are some of the advantages of long-term FDs:

• They are relatively safe investment alternatives with almost zero risk involved and assured returns. The correlation between the returns on a fixed deposit and market related volatility is practically non-existent as the rate of interest remains fixed throughout the investment horizon.

• Banks, NBFCs, and post offices offer higher rates of interest in comparison to those offered by traditional savings accounts and even short term fixed deposit accounts.

• You can claim tax deductions by investing in long-term FDs as per Section 80C of the Income Tax Act, 1961 (applicable only for tax-saver FDs with a tenure of 5 years). 

• Long-term FDs can be pledged as collateral for loans
  Long-term FDs can be used as a security deposit when applying for a credit card.

• Overdraft facility can be availed by virtue of long-term FDs.

• Senior citizens can avail higher interest rates on their FDs than regular customers.

• The lock-in period is very long for long-term FDs, usually five years or more. So, it will be difficult to acquire the investment if you need funds urgently for unanticipated events or emergencies. Financial institutions provide the facility of premature withdrawal, but penalty charges are usually applied.

• Long-term FD interest rates are slightly lower in comparison to that offered by debt mutual funds. Debt mutual funds are viewed to carry comparable risk and hence they enjoy an edge over Long term FDs by offering higher risk adjusted  returns.

• While investing in long-term FDs, many people do not think about the impact of inflation. It is prudent to consider the fact that the real returns on a long term fixed deposit reduce with inflation.

There are two methods to apply for a long-term FD, online and offline. Let us have a look at both methods.

Online Method

• Log in using the netbanking facility from the bank’s official website. You can also log in through the bank’s official app. The same is applicable to the chosen NBFC or post office.

• Search for the “Open Fixed Deposit” tab.

• Fill out the necessary details including the investment amount, the tenure, and the nominee for your account.

• Then transfer the investment amount and complete the application process.

Offline Method

• Visit the nearest branch of the bank, NBFC, or the post office in which you already have a savings account or wish to open an FD account.

• Request an FD application form and fill out all the necessary details, including the investment amount, the tenure, and the nominee for your account.

• Submit the required documents –address proof, identity proof and any other document the institution deems necessary.

• Submit the investment amount in cash or by cheque. If you already have a savings account, the amount will be transferred from the savings account to the FD account.

• The application will be processed, and you will receive a fixed deposit certificate within a day or two.

A long-term fixed deposit is a good low risk investment option. Financial institutions such as banks, NBFCs, and post offices offer you higher interest rates on long term FDs in comparison to short-term FDs.

As you diversify your portfolio, you need relatively safe financial instruments that offer assured returns capable of enabling you to build a reliable corpus. Due consideration should however be given to your unique financial situation at the time of zeroing down on investment tenure.