Investing wisely and allocating money appropriately is essential in building a sound financial future or managing rising levels of inflation in addition to the time and effort required to accumulate money. How one chooses to invest money will depend on one’s individual financial objectives, risk tolerance, investment duration and investment vehicle of choice.

Many viable long-term investment vehicles exist, including stocks, equity mutual funds, public provident fund (PPF), as well as public sector savings accounts, however, bank FDs continue to be viewed as one of the safest and hence most common types of investment for individuals searching for guaranteed returns.

There are several reasons behind the continued popularity of FDs as an investment vehicle. In India, banks and other non-banking financial institutions (NBFCs) offer fixed deposits with a range of maturities from 7 days to 10 years. While an investor’s fixed deposit can yield a good return on investment, prudent selection of maturity period, along with other factors, impacts an FD investor’s overall investment strategy.

One or multiple fixed? Investors are in a dilemma

A common question that investors face is whether they should invest the entire amount in a single fixed deposit or divide it into multiple fixed deposits. For example, if you have Rs 7 lakh to invest, should you invest in one fixed deposit of Rs 7 lakh or seven fixed deposits of Rs 1 lakh each?

Experts say that if the interest rate is the same, the final maturity amount including interest will be the same in both the cases. The real difference lies in the convenience, flexibility and how well the investment suits your needs.

Advantages of a single fixed deposit:

For those who prefer simplicity, keeping the entire Rs 7 lakh in a fixed deposit can be the easiest option. You will have only one deposit receipt, one maturity date and only one account to monitor. This method is suitable for investors who prefer the ‘invest and forget’ strategy and are sure that they will not need the funds for the entire tenure, even up to 10 years.

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Disadvantages of a large fixed deposit:

The main problem with a large single fixed deposit arises when you need the money a lot. If you need just Rs 50,000, you cannot withdraw just that part, you will have to break the entire fixed deposit of Rs 7 lakh. If you withdraw the money before maturity, there is a penalty on the entire amount, which reduces the overall returns.

There is also a security concern. As per India’s DICGC norms, deposits in each bank are insured only up to Rs 5 lakh. If you invest Rs 7 lakh in a bank, the remaining Rs 2 lakh will not be insured in the rare event of a bank failure.

Why do experts call multiple FDs ‘smart investments’?

Experts often describe splitting your investment into multiple FDs as a smart move. By splitting Rs 7 lakh into seven FDs of Rs 1 lakh each, you gain more control over your money.

If you need Rs 1 lakh, you can withdraw only one FD, while the remaining Rs 6 lakh continues to earn interest. Importantly, the penalty is applicable only on the withdrawn portion, not the entire investment.

If you keep these seven FDs in two different banks, your entire investment can be covered by DICGC insurance. This significantly reduces the risk and increases the safety of your savings.

Flexibility in case of interest rate changes:

Multiple FDs also provide flexibility in case of fluctuating interest rates. For example, if you make an FD today at 7 per cent interest and next year the interest rate increases to 8 per cent, you can withdraw one short-term FD and reinvest at a higher rate.

This flexibility is not available in the case of a single long-term FD.

Disadvantages of multiple FDs:

The main disadvantage of splitting your investment is its added complexity. You have to track multiple receipts or digital confirmations and remember different maturity dates. This may seem inconvenient to some investors.

Which option should you choose?

There is no one-size-fits-all formula for investing in FDs. If you already have a sufficient emergency fund, want a hassle-free investment and are sure that you will not need the money for many years, then a single FD may be the best fit for you.

However, if you prefer flexibility, want protection from changing economic conditions and want to be prepared for unexpected expenses, then opting for multiple FDs is a more realistic choice.

Ultimately, the best FD strategy depends on your financial goals, risk appetite and personal circumstances. Choosing the right structure can make a significant difference in how effectively your money works for you.