Short-Term Vs Long-Term Fixed Deposits: Key Differences

One of the greatest features of a fixed deposit is its flexibility. Based on your monetary goals, you can either book a short-term FD or go for a long-term FD. This versatility makes it a suitable option when you are aiming to diversify your portfolio with a low-risk investment. 

A long-term FD will help build your wealth, and a short-term FD will take care of upcoming goals. By understanding their differences, you can better assess your financial objectives and choose the best option. Read on to understand how to pick the best one or achieve a balance between them both.

What is Short-term FD (STFD)?

As the name goes, STFDs are ideal for investing your money for a shorter tenure. It can be as short as 7 days or as high as 2 years. Depending on your preferences, you can choose the tenure, and accordingly, you will earn interest on your deposit.

Pros and Cons of Short-term FDs

Here’s a brief overview of how it benefits you as well as its drawbacks:

Pros of Short-term FD	Cons of Short-term FD
You have liquidity within easy reachYou can choose a flexible tenureYou can reinvest the returns to get better interest	It usually has lower interest rates than long-term depositsYou may not get a high interest rate on reinvestmentYou may not be able to leverage all the benefits of compounding for wealth accumulationIt may not help you get a loan against FD due to its short tenure

What is Long-term FD (LTFD)?

With this type of FD, you invest your savings for a longer period. With this option, you can invest your money from 2 years up to 10 years, based on what aligns with your financial goals. The interest rates are relatively higher, so your returns are generally higher with this option.

Pros and Cons of Long-term FDs

Here is a short overview of how a longer tenure can help your financial objectives as well as some of its drawbacks:

Pros of Long-term FD	Cons of Long-term FD
1. You can earn a higher interest rate  2. It helps you meet long-term financial goals 3. It allows you to benefit from the power of compounding 4. It helps you get a loan against your FD with ease	1. You cannot liquidate your funds easily 2.  You cannot get the benefit of higher interest rates while your funds are locked in

Short-term FD vs Long-term FD

To understand which one may work best for you, see the table below:

Topics	Short-term FDs	Long-term FDs
Investment Period	It can be invested for 7 days to 2 years	Over 24 months to 10 years
Interest Rates	Generally, short-term deposit rates are lower than long-term FDs	Higher interest rates offer better returns on maturity
Liquidity	Delivers quick liquidity and easy access to funds	Limited liquidity, as it has an extended lock-in period
Financial Goals	Suitable for meeting immediate needs	Aligned with long-term goals like education or retirement planning
Flexibility	Provides flexibility to respond to changing market conditions	Offers less to no flexibility, and premature withdrawal may incur penalties
Wealth Accumulation	Best for short-term payouts	Gives you to opportunity to build your wealth over time
Risk Tolerance	Lower risk due to shorter tenure and flexibility	Moderate risk due to a more extended lock-in and rate rigidity

How to Choose Between Them?

While choosing which type of FD will suit you the best, consider the following options:

• STFDs have lesser risk than LTFDs, so you can choose according to your risk appetite 
• You must consider the minimum investment amount of the issuer for each type of FD while choosing
• If you want higher interest, choose a long-term deposit
• Choose a short-term deposit for higher liquidity 
• If you do not have access to emergency funds, choose short-term fixed deposit 

The key to growing with FDs is to find a balance between short and long-term fixed deposits. Thus, it’s best to have funds deposited for long-term gains while keeping a short-term FD that you can reinvest regularly. In this way, you can have the following benefits:

• Diversification: This will take care of your short and long-term goals 
• Wealth Building: Your long-term FD will build your wealth 
• Access to Emergency Funds: Your STFD can work as your emergency funds

For both of these investments, premature withdrawal can result in interest penalties. Thus, it’s best to have other options available in case of any financial or medical emergency. 

FAQs on Short and Long-term FDs

Which FD option offers more liquidity: short-term or long-term?

Short-term deposits offer more liquidity. However, short-term deposit rates may be lower than long-term fixed deposits, so compare them before you proceed. 

Should I choose a short-term or long-term FD during rising interest rate periods?

Short-term FDs are best during this time as you can access your funds quickly and reinvest them at a higher rate with ease.