The Novice Investor’s Million Dollar Question: Book a Fixed Deposit or Open a Demat Account ? | Get Financial Freedom Tips | Transform Your Financial Future


Thursday, February 16, 2012

The Novice Investor’s Million Dollar Question: Book a Fixed Deposit or Open a Demat Account ?

One of the biggest questions that a new investor faces when markets are turbulent is whether to safeguard his money in fixed deposits as per prevailing FD rates or to open a demat account and start investing in the stock markets.

A fixed deposit is a type of investment wherein an individual deposits a particular amount with a bank for a fixed tenure. This deposit would fetch him returns, dependent on the bank’s FD rates.

A few benefits of a fixed deposit are :

a) The investment is safe, provided the depositor deposits the money with a recognized bank

b) The depositor will surely earn an interest component on his deposit. Also, the benefits of compound interest may be reaped.

c) A fixed deposit has tax advantages, too. Bank fixed deposits booked by an Individual/HUF for 5 years of amounts up to Rs. 1,00,000/- are allowed exemption under Sec 80C of the Income Tax Act, 1961, subject to necessary declarations taken from the customer.

A few limitations of a fixed deposit are :

a) The deposited amount cannot be withdrawn till the time of maturity.

b) FD rates are generally very low as compared to other investment options like stocks or mutual funds

c) As per Sec 194 A of the Income Tax Act of 1961, the bank will have to deduct TDS on income on interest exceeding Rs 10,000/- in any financial year.

Now, for an aggressive investor who wants to make quick money, there is an option to open a demat account with a registered broker and start trading in the stock markets. However, the investor should be willing to bear the consequences of fluctuating share prices.

A few advantages of investing in stock markets are :

a) The investor enjoys high returns on investment.

b) The money invested in good stocks can fetch the investor excellent returns through regular dividends announced by the company.

c) The investor enjoys the benefits of appreciating share prices.

A few disadvantages of investing in stock markets are:

a) There are no guaranteed returns on the investment. Also, the investor can lose money if investments are made in fundamentally weak companies.

b) Many a times, the investor does not know whether to hold a stock or to sell it, if share prices start depreciating.

c) Predicting share prices of companies is an almost impossible task as there are multiple factors determining it, which may not necessarily be in the hands of the investor.

Hence, your investment choice should ideally depend on the points mentioned below :

• The tenure of the investment

• Your risk appetite

• The lock-in period

We hope the points discussed here will help you make a sound financial decision and manage your liquidity well.

All the best!

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