Fixed deposits (FDs), also called term deposits, are among the most popular investment options in India. Most of you will have FDs in your investment portfolio, and before you, your parents would have also invested in fixed deposits over decades.
The ease of investment, safety, and liquidity are a few reasons for their popularity.
What Is a Fixed Deposit?
A fixed deposit is an investment instrument where you deposit a lump sum amount for a predetermined term and at a fixed rate. The rate does not change during the FD tenure and is not affected by the market conditions or changes in interest rates after you lock in your FD.
Though the deposit is for a fixed term, lenders may allow you to withdraw the money before the tenure ends, subject to certain conditions; they may charge some penalty.
To create an FD with a bank or a Non-Banking Finance Company(NBFC), you open a fixed deposit account with the bank or the NBFC.
If you already have a savings account, the bank may link your savings account with the deposit, and no additional documents may be required. You must submit KYC documents, address proof, and a PAN card copy if it is a new relationship.
Key Characteristics of an FD
Some key FD characteristics are listed below:
- You must decide on the fixed deposit amount before creating the FD. If you want to deposit additional funds for a fixed term, you cannot do so in the existing deposit but will have to start a separate new FD.
- Generally, high-interest FDs are for longer terms or some special periods.
- When you deposit the amount, the interest rate and the maturity amount are fixed; there are no fluctuations during the term.
- Except for a tax FD, most banks and NBFCs allow you to withdraw an FD before maturity. In the event of premature withdrawal, banks levy some penalties and adjust the interest rate based on the duration that the FD is with the bank.
- You have the option to select a cumulative or a traditional FD. In the former option, you get the interest on maturity. For the latter option, you can choose monthly, quarterly, semi-annual or annual pay-out.
- You can renew the deposit on maturity at the prevailing rate.
Advantages Of Fixed Deposits
Fixed deposits offer some benefits; the following are some of the advantages of a fixed deposit:
FDs are a very safe investment option. The principal and returns are fixed; your principal cannot erode, and your returns cannot fluctuate.
Power of Compounding
In the traditional FD, your interest gets compounded; you earn interest on interest. Compounding comes into play also when you renew your FD with the maturity amount.
Fixed deposits can help you in tax planning too. Banks offer tax-saving FDs, which can help you save tax under section 80C of the Income Tax Act 1961. These FDs have a lock-in period of five years.
Loan Against FD
In times of need, you can take a loan against your deposit rather than close the fixed deposit account or withdraw your deposit. A loan against an FD is a simple process that does not require too much time or a complicated application process.
Fixed deposits offer you flexibility; you can start a deposit with as less as Rs 10000 at any time you want. FD tenures range from 7 to 10 years; you can choose the tenure based on your needs or go for the high interest FD and pick the term accordingly.
Interest payments on deposits are also flexible; you can wait till maturity or take them periodically, depending on your financial requirements.
Fixed deposits have remained popular over decades owing to a host of factors. There are a host of investment products to choose from; however, FDs have their utility and can also be a useful tool in financial planning. Pick the right FD type based on your need and watch your money grow.