Selecting the right investment option can make a major difference in your journey of wealth generation. Investing your hard-earned money in the right place financially empowers you. For individuals who value the liquidity of their funds, they may opt for flexi funds. Meanwhile, individuals looking for long-term deposits and a steady interest rate may opt for a fixed deposit.
This article will give you close insights into flexi and fixed deposits. Also, it will help you choose which one is a better fit for you.
What is a Flexi Deposit?
Flexi Deposits are deposit accounts connected to your savings account. When your savings account balance exceeds a certain limit, the amount beyond that limit is automatically transferred (swept in) to an FD in multiples such as ₹5,000 or ₹10,000. These deposits get higher interest like FDs, but at the same time, they remain as liquid as a savings account. If you require money, the bank will only break the part of the FD that is required and transfer it to you, thus you can always access your money.
Key Features of Flexi Deposits:
- Auto Sweep-In/Out: Excess funds over a specified limit are automatically transferred to an FD.
- Partial Withdrawals Allowed: Only the required chunk is broken, preserving the rest.
- Linked to Savings Account: Operates jointly with your savings or current account.
- Earns FD-Like Interest: Typically, similar to short-term FD rates.
- Flexible Tenure: Each sweep deposit may have a different maturity.
Pros:
- Automatic Reverse Sweep and Sweep-In: Eliminates effort in handling idle cash; additional funds are utilized.
- High Liquidation: Withdrawable without encashing the whole FD.
- Higher Returns than Savings Account: Provides an FD-like return on excess balance.
- Flexible Framework: Tails to your cash flow and is perfect for uncertain or emergency expense cycles.
Cons:
- Short-Tenure Interest is Lower: When compared to long-term FD, interest rates will be marginally lower.
- Limited Availability: Flexi Deposits are not available at all banks.
- Complex Tracking: While several small FDs (sweeps) can be made, it is difficult to track.
- Minimum Balance Needed: You need to keep a minimum threshold balance to enable the sweep-in feature.
What is a Fixed Deposit?
A Fixed Deposit (FD) is a conventional investment wherein a single amount is invested with the bank for a predetermined period at an agreed interest rate. It is a no-risk product with guaranteed money and is suited for long-term savings. Unlike Flexi Deposits, money withdrawn prematurely leads to a penalty.
Key Features of Fixed Deposits:
- Fixed Tenure: Can be from 7 days up to 10 years, depending on what you choose.
- Stable, Assured Returns: The interest rate is fixed and will not follow changes in market rates.
- Low-Risk Investment: The return is guaranteed, and capital is protected.
- Premature Withdrawal Penalty: Money can be taken out early, but it will incur fines and penalties.
Pros
- Guaranteed, Predictable Returns: Fixed interest for the duration, perfect for budgeting.
- Secure Investment: Low risk and appropriate for cautious investors.
- Additional Benefits for Seniors: Seniors are eligible for higher interest rates.
- Customizable Tenure: Select either a short-term or long-term tenure based on your objectives.
Cons
- Low Liquidity: Penalties and lower interest are incurred for early withdrawal.
- No Gain from Rate Increases: Once locked, you are unable to benefit from interest rate increases.
- Impact of Inflation: Returns might not always outpace inflation, particularly over extended periods of time.
- Rigid Structure: You have to break the entire FD; you cannot withdraw partially.
Flexi vs Fixed Deposits Comparison
| Feature | Flexi Deposit | Fixed Deposit (FD) |
| Deposit Structure | Linked to savings; auto-sweeps in | Lump sum invested at once |
| Liquidity | High, as funds can be auto-reversed | Low, early withdrawal involves a penalty |
| Interest Rate | Similar to short-term FDs | Higher for longer tenure |
| Tenure | Varies | Chosen at the time of deposit |
| Withdrawal Flexibility | Partial withdrawals (in chunks) | The entire FD needs to be broken |
| Best Suited For | Those with fluctuating cash needs | Goal-based long-term investors |
| Availability | Offered by select banks | Available at all banks and NBFCs |
Select Flexi Deposit if you:
- Keep your savings account balances high.
- Desire better interest rates and quick access to money.
- Prefer passive, automated fund management.
Select a fixed deposit if you:
- For long-term savings, have a lump sum.
- Desire capital safety and fixed, higher returns.
- Don’t use the invested funds before they mature.
Bottomline
The conclusion can be drawn that it is essential to align your investment goals with your investment options. Flexi deposits are like a savings account but with the added benefit of an FD. Young investors who are not ready for a long-term financial commitment, then a flexi deposit is the right fit. Meanwhile, if you have extra cash in hand that you are ready to invest for a longer duration, then a fixed deposit is the right choice.
It is important to analyse your profile and not follow the herd mentality for the best financial gains.
