How to Build Your Financial Portfolio: Fixed Deposits versus The Rest
According to Investopedia, a financial portfolio is a collection of financial investments, like stocks, bonds, cash, and fixed deposits. We’ve already written about how a fixed deposit works. Today, we’re going to look at how a fixed deposit can boost your financial portfolio and how it compares to other investments.
Is a fixed deposit right for me?
First, you need to decide on your appetite for risk. There may be daredevils among us. However, most people prefer low risks and relatively high rewards. And a fixed deposit, or FD, fits that bill. Fixed deposits give guaranteed returns at the end of your investment, with money earned significantly exceeding savings accounts. Even if you’re saving for short-term goals, you can get a FD for one-year and make your money work for you.
How do FDs compare to other investments?
A mutual fund is a financial vehicle where many investors pool their money to invest in securities. Mutual funds are managed funds, so the fund’s success depends on the savviness and skill of the manager.
FDs are a safer investment because of guaranteed interest and the receipt of your principal upon maturity. Contrastingly, mutual funds do not offer guaranteed returns, although returns can be higher if you’ve got a good fund manager.
Exchange Traded Funds (ETFs)
ETFs are pooled investments like mutual funds with one big difference – ETFs can be traded on the stock market. ETFs are volatile with frequently fluctuating prices; that means that risks are high, and returns cannot be predicted over time.
By contrast, the value of your FD only increases over time, and you know exactly how much money you’ll have at the end of your investment term.
The U.S. Securities and Exchange Commission tells us to think of a bond as an IOU. Basically, a bond represents a loan where you (the investor) lend money to the borrower.
Both bonds and FDs involve investing a fixed sum for a fixed period with a fixed interest rate. So, the benefits are similar. Some bonds do issue payments before the term is up. However, zero coupon bonds issue no such payments, and you’ll get your money upon maturity just like an FD.
While the benefits are comparable, the drawbacks for withdrawing money early are more severe for bond investors. If you need to break an FD, there’s no interest rate penalty for one-year investments and a fixed penalty for longer investments.
Cashing in a bond ahead of time will be more costly. And, unless the bond underwriter has a buy-back clause, you’ll need to sell it on the secondary market. So… you’ll need to find a buyer. Since there are different types of bonds, you’ll have to find a buyer who wants what you’re selling.
Rome wasn’t built in a day. And your financial portfolio will take time also. If you want to learn more, you can visit our fixed deposit page. Remember that you can always talk to an expert about expanding your financial portfolio.
We also want to end with a word of caution. If an investment looks too good to be true… it probably is. Always do due diligence and make sure you’re building your financial portfolio with care.