Adding stable instruments to offset stock market volatility is one of the most important tactics in portfolio diversification. Such instruments range from commodities like gold to debt instruments like Fixed Deposits.
That said, people often turn a blind eye to Fixed Deposits. However, there are several reasons why an FD is an ideal investment vehicle to diversify your portfolio. Let us understand what these are.
Stability of returns
Fixed Deposits provide stable, predictable returns. Unlike stocks, your returns are calculated and locked in at the start. Unless you break an FD prematurely, your earnings are guaranteed. This is the primary reason FDs serve as a reliable hedge against portfolio volatility.
Independence from market movements
Commodities like gold are often touted as the ‘perfect safe-haven assets.’ But even gold is impacted by market fluctuations and global shifts. This is where FDs have a clear edge. Once you successfully book an FD, your money is locked in. And this deposit is not influenced by macroeconomic trends, even in extreme situations such as recessions or market crashes.
No impact on compounding during emergency withdrawals
Your investments in shares and funds compound over time. And due to the compounding snowball effect, your earnings curve gets increasingly steeper with time. Therefore, if you must withdraw in an emergency, you lose all the compounding progress made up to that point. FDs are the ideal portfolio constituent in such situations. As the returns are predetermined, premature breaking results only in insignificant penalty losses.
Ability to match your tenures to your goals
Fixed Deposits provide you with the ability to align your investment goals and investment horizon. This is not possible with stocks and mutual funds. These market-linked instruments do not have a predetermined maturity value or a predictable end date. Therefore, it becomes difficult to plan your investments in line with your objectives.
Having an FD in your portfolio increases the certainty of hitting your targets within the desired timeline. Here, a tool like an FD maturity calculator is particularly helpful. It provides you with a comprehensive view of various amounts at the time of a deposit’s maturity.
Conclusion
Despite these advantages, Fixed Deposits are not perfect and come with trade-offs. For their stable returns, interest rates are generally the lowest among investment vehicles. Similarly, while they are insulated from market movements, FDs can lose ground against rising inflation.
Therefore, choosing the right FD scheme becomes essential. Not only is securing the right interest rate for your desired tenure necessary, but so is the reputation of the bank. A reputable bank offers the assurance that your funds are safe. Therefore, it is advisable to conduct thorough research, compare schemes and make an informed decision.
