Why Fixed Deposits Are Suitable For Creating An Emergency Fund; Check Latest Interest Rates Here

The focus, when building an emergency fund, should be on liquidity, safety, and stability. Fixed deposits (FDs) check all these boxes and are a great option for this purpose.

Unlike mutual funds or stocks, FDs are not tied to market performance and hence, are less vulnerable to market fluctuations.

Source : Paytm Blog

By Malvika Singhal

The last few years have been instrumental in emphasising the importance of having an emergency fund. Geopolitical unrest has led to economic instability and inflation all over the world. In such times of uncertainty, an emergency fund can provide much-needed relief by acting as a financial cushion. Be it a medical emergency, unavoidable repairs, or a job loss, an emergency fund can help you tide over the challenging time until you can get back on your feet. 

The focus, when building an emergency fund, should be on liquidity, safety, and stability. Fixed deposits (FDs) check all these boxes and are a great option for this purpose. Let’s find out how. 

Safe and Secure

FDs are a debt-based instrument that is popular for being low risk. Unlike mutual funds or stocks, FDs are not tied to market performance and hence, are less vulnerable to market fluctuations. Moreover, bank FDs up to Rs 5 lakh per depositor are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), adding an extra layer of security to your investment. So, from a safety standpoint, which is crucial for an emergency fund, FDs are suitable. 

Predictable Returns

Stability is another advantage offered by FDs that can be helpful for creating an emergency fund. Since FDs allow you to deposit capital for a fixed rate and tenure, you can determine the exact returns upon the maturity of your investment. While these returns may not be as high as those offered by market-linked instruments, the assured and predictable returns can aid in more efficient planning for your emergency fund. 

Liquidity

When choosing an instrument to create your emergency fund, liquidity is one of the most important factors to consider. While FDs typically attract a premature withdrawal penalty, many banks also offer liquid FDs that charge a lower penalty and quicker access to funds. Easy liquidity is particularly useful during an emergency when there is an urgent need for funds.  

With the many benefits, fixed deposits are an ideal avenue for building your emergency fund. If you want to maximise your returns further, try laddering your FDs by investing in multiple FDs with varying tenures. 

Interest Rates For FDs

If you are planning to invest in an FD, check out the interest rates for 1-2 year FDs being offered by leading private banks. 

Bank	Interest Rate (Tenure: 1-2 year)
DCB Bank	8.05%
Bandhan Bank	8.05%
Catholic Syrian Bank	8.00%
RBL Bank	8.00%
IndusInd Bank	7.99%
YES Bank	7.75%
TNSC Bank	7.75%
IDFC Bank	7.75%
Karnataka Bank	7.50%
Karur Vyasya Bank	7.50%
Data compiled by BankBazaar.com. Data as on respective banks’ website on 3 Jan 2025; For each year range, the maximum offered interest rate is considered; interest rate is for a normal fixed deposit amount below ₹1 crore.

(The writer is Senior Manager, Communications, BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar.)