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Short-Term or Long-Term – Which FD Plan is Better in the Current High-Interest Rate Environment?  

The interest rates are rising as a result of the consistently high inflation rates. As an FD investor, you may be a little confused if this will impact your FD returns. If yes, positively or negatively. This post tries to bring clarity to this seemingly difficulty topic.     

Typically, the PNB FD interest rate is fixed for the entire tenure. It doesn’t change with the change in the central bank’s interest rates, as may be the case with a savings plan. 

But in a high-inflation economic environment, your return from the Fixed Deposit may not bring gains in the true sense. It’s because inflation will offset the gains in varying degrees. 

To avoid this, FD investors will do better by investing in longer-term fixed deposit plans. This kind of FD investment will likely escape the high inflation environment and preserve the value of their gains.       

In other words, as the central bank is trying to tame inflation and taking concrete steps towards that, FDs at the prevailing rates can offer genuine returns in the medium to long term.   

What are Fixed Deposits?

A fixed deposit is simply investing a fixed amount of money for a fixed tenure with a fixed interest rate. This is a scheme that most banks and financial platforms provide. 

An FD plan offers a higher interest rate than ordinary savings accounts. Return assurance is the top benefit of FDs, with almost zero risk of losing the funds. If the money from an FD is withdrawn prematurely, however, a penalty has to be paid. 

Short-Term FD

As the name suggests, short-term FDs have a shorter tenure. This period can vary from a week to two years. 

A short-term FD account can be opened with a minimum of Rs 10,000. This plan may suit some people and their financial goals. A short-term FD can be considered a good option only if you need your funds in the short term, say, in 6 to 12 months. 

For example, the PNB FD interest rate varies from 3% to 6.10% on different tenures. If you need your money in the short term, even a 3% to 5% return can be a good deal as it can effectively offset the impact of inflation on the value of your money.    

Long-Term FD

In the long-term fixed deposit, the money is fixed for a longer tenure and attracts a higher interest rate. It can be a better choice from an investor’s perspective as it receives a higher interest rate and escapes the current inflationary environment. 

For example, the PNB fixed deposit interest rate for long-term FD can vary between 5% and 6.10%. While this is a substantial increase over the short-term FD rate, the money is also spared from the current unfavourable money market realities.          

What’s the Best FD Plan?

Choosing a short-term or long-term FD plan depends on your financial goals.

If you want your money back in a few months to a year’s time, a short-term FD plan is all that you have. While you may earn the returns per the applicable FD interest rate, exposure to high inflation is not great for your funds.     

If you can afford to keep your money parked in FD plans for the long term, this can be a better option in the current inflationary environment.

However, the best thing to do would be to diversify your FD investment in all possible options. It means if you look at your financial needs, you can identify how much to invest in different tenures of FDs. 

In Conclusion

Given the constantly high inflation rate worldwide, central banks are expected to continue increasing the rates for some time. A matter of concern for FD investors is not the high interest rate but the high inflation rate. They can protect the value of their money and returns from the FD by choosing a long-term plan. 

But the choice is relative to your financial goals and how soon you need your money. Given this, you can choose short-term, medium-term, and long-term FD plans instead of putting all your money in any one term.    

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