Regarding managing surplus money, two of the most common options people in India consider are savings accounts and fixed deposits. Now, how do you decide which one better suits your needs? Both have their advantages and limitations depending on your financial situation and goals.
This article will discuss savings accounts and fixed deposits in simple terms to help figure out what works better for you.
Understanding Savings Accounts
A savings account is a basic type of deposit account that banks offer. It is designed for individuals to deposit money and earn interest on their balances.
It allows easy access to your funds whenever needed and is ideal for parking emergency funds or short-term surpluses.
Key Features of Savings Accounts
Understanding the essential features of savings accounts can help you choose the right option when you decide to open savings account that aligns with your financial needs and goals.
- Interest Rate– You earn between 3% and 5% yearly interest on savings account money. This return is lower than fixed deposits, but your money still grows.
- Liquidity- One significant benefit is that your money is available on demand for withdrawal or transfer without restrictions. This flexibility helps during unexpected expenses.
- Convenience- With net banking and mobile banking, monitoring your account is more convenient nowadays than physically visiting bank branches.
- Average Balance Rule- Banks usually require you to maintain a minimum average balance each month; if you don’t, fees may be charged. The exact amount depends on the bank.
Advantages and Limitations
Exploring the benefits and drawbacks of savings accounts will help you determine if they suit your financial strategy.
Advantages
- Withdraw cash instantly for emergencies
- Flexible to use money anytime needed
- Digitally manage accounts from anywhere
Limitations
- Interest earned is generally on the lower side
- Inflation can reduce purchasing power over time
Understanding Fixed Deposits
A fixed deposit (FD) involves placing a single lump sum with a bank for a specified term, during which you earn a predetermined interest rate.
The tenure can vary between 7 days to 10 years. FDs are popular investment products because they usually offer assured higher returns than savings accounts.
Key Features of Fixed Deposits
- Interest Rate- Depending on the amount, tenure, etc., you earn up to 7.5% annual interest on FDs. Rates are higher than those in savings accounts.
- Lock-in Period- To earn the projected returns, the money must remain invested in FD for the period you select without premature withdrawal.
- Flexible Tenures- FDs allow you to choose a suitable duration from 7 days to 10 years, as you require.
- Guaranteed Returns- The interest rate is fixed, so returns are assured, provided the FD is held until maturity.
Advantages and Limitations
Advantages:
- Earn higher interest than savings accounts
- Returns are fixed at the time of investment
- Tenures can be customised as needed
Limitations:
- Money locked in, low liquidity
- Premature exit attracts a penalty affecting gains
Key Differences Between Savings Accounts and Fixed Deposits
Identifying the differences between these two financial instruments can help you make a more informed decision:
| Feature | Savings Account | Fixed Account |
| Interest Rate | 3% – 5% per annum | Up to 7.5% per annum |
| Liquidity | High (accessible anytime) | Low (locked in until maturity) |
| Tenure | No fixed tenure | Fixed tenure (7 days to 10 years) |
| Withdrawal Penalty | None | Penalties apply for early withdrawal |
| Ideal For | Emergency funds | short-term savings, and Long-term savings goals |
Which Option Should You Choose?
Here are some tips to decide whether a savings account or fixed deposit works better for you:
- If your priority is liquidity for short-term needs, opt for a savings account
- If you want higher but assured returns over the next 3-5 years, a fixed deposit is better
- Assess your risk tolerance and expected liquidity needs
- Align the option chosen to your financial goals and timelines
Conclusion
Both savings accounts and fixed deposits offer unique advantages. A savings account provides flexibility and easy access to funds, while a fixed deposit is ideal for securing higher returns over time. Assess your financial goals to determine which option best suits your needs.
