Fixed Deposits (FDs) or term deposits are an important component in a financial portfolio. When it comes to investing in a term deposit, most people are confused about what time duration to choose. Long-term fixed deposits are usually held for five years to 10 years. Generally, the tenure range offered on all types of deposits (short, medium & long) ranges from 7 days to 10 years. Some banks may offer a higher interest rate for a longer investment duration, but this differs from bank to bank. The maximum duration for long-term deposits is ten years, but some banks may also offer a higher duration in India.
Are you planning to Invest in Long-Term Fixed Deposits? Our article helps you understand the concept of long-term FDs and derives meaningful comparisons in order to help you make an informed decision.
What is a Long-Term FD?
A long-term fixed deposit is a type of deposit that is invested for a duration that is between 5 to 10 years or even more.
Characteristics of a Long-Term FD
| Characteristic | Description |
| Duration | Typically, several years, ranging from 5 to 10 or more |
| Interest Rate | Generally higher compared to short-term deposits |
| Liquidity | Limited access to funds during the deposit period |
| Risk | Relatively low risk, especially in reputable banks |
| Returns | Predictable and stable, with compounded interest |
| Penalties for Early Withdrawal | Penalties may apply if funds are withdrawn before maturity |
| Renewal Options | Options to renew or roll over the deposit may exist |
| Purpose | Ideal for long-term financial goals and planning |
| Tax Implications | Interest earned may be subject to taxation |
Advantages of a Long-Term FD
There are tons of advantages of Long Term FD if one is deciding to make a long-term investment.
- Higher Interest Rates: Long-term FD typically offers higher interest rates compared to short-term deposits, allowing for higher returns on your investment.
- Stability and Predictability: Long-term fixed deposits provide a stable source of income as the interest rates are fixed for the entire duration.
- Financial Planning: They are ideal for long-term financial planning, such as saving for a child's future.
- Compounding Benefits: The interest earned on a long-term FD often compounds; you earn interest on your deposit as well as on the interest over time, leading to enhanced returns.
- Low Risk: Fixed deposits are generally considered low-risk investments, especially when held in reputable banks or financial institutions.
- Protection against Inflation: Long-term fixed deposits can provide a level of protection against its impact, as the fixed interest rate may inflate over time.
- Loan against FD: In some cases, you may have the option to take a loan against your long-term fixed deposit, providing liquidity without breaking the deposit.
Interest Rates Offered on Long-Term Deposits
| Aspect | Long-Term Fixed Deposit | Regular Fixed Deposit |
| Duration | 5-10 years | 1-5 year |
| Interest Rate | Generally higher | Moderate to lower |
| Stability | Offers stable rates for the entire tenure | Rates may vary upon maturity or renewal |
| Returns | Potentially higher returns due to compounded interest | Returns may be comparatively lower |
| Risk | Low risk | Low risk |
| Liquidity | Limited access to funds during the deposit period | Access to funds may be more flexible |
| Purpose | Ideal for long-term financial goals | Suitable for short to medium-term needs |
| Flexibility | Often less flexible, with penalties for early withdrawal | More flexibility in terms of withdrawal options |
How To Apply For A Long-term FD
The process involved in applying for this type of time deposit is very similar to the regular method.
- One can go to the bank website and apply online through net banking or fill out an online application.
- You can also apply on a number of third-party financial websites, and you can compare interest rates of a number of bank FDs and then apply for it online through the website.
Disadvantages of Long-Term FD
Despite numerous benefits, there are some disadvantages of Long Term FD :
- Limited Liquidity: Long-term fixed deposits usually come with limited or no access to funds during the deposit period. Withdrawing before maturity can result in penalties, making it less liquid compared to some other investment options.
- Opportunity Cost: In a dynamic economic environment, engaging in a long-term fixed deposit may mean missing out on higher returns available in other investment plans.
- Interest Rate Risk: If interest rates rise after you've invested in a long-term fixed deposit, you might miss out on the opportunity to earn higher rates.
- Inflation Impact: While fixed deposits provide stability, the returns may not always reduce inflation. This means the real purchasing power of your returns could decrease over time.
- Penalties for Early Withdrawal: Breaking a long-term FD before maturity often incurs penalties.
- Interest Rate Fluctuations: In a changing economic climate, the interest rate you invest in for the long term might become less competitive compared to new rates.
- No Market-Linked Returns: Long-term fixed deposits provide a fixed interest rate, so you won't benefit from the higher returns that market-linked investments might offer.
- Tax Implications: Interest earned on fixed deposits is usually taxable, and this can impact the overall returns.
What Is the duration of a long-term FD?
The duration of a long-term fixed deposit varies but is generally several years, ranging from 5 to 10 years or more.
What is the Interest Rate Offered on Long Term FDs?
Long-term FDs often offer higher interest rates compared to short-term deposits. The rates are fixed for the entire tenure, providing stability and potentially higher returns.
Can I Withdraw Money from a Long Term FD before maturity?
While it is possible to withdraw funds from a long-term FD, it often charges penalties. This can impact the overall returns, and in some cases, early withdrawal may not be allowed.
How Does The Interest Get Calculated in a Long-Term FD?
The interest on a long-term FD is calculated not only on the initial principal but also on the interest earned over previous periods.