A Fixed Deposit is a term deposit for a specified period of time where a fixed rate of interest is payable. The interest is payable monthly, quarterly, half-yearly or annually. Upon maturity, the principal plus interest is returned to the depositor.
Key Features of Fixed Deposits
Assured Returns: When you invest in a fixed deposit, you can be guaranteed of returns.
Flexible Tenure: You can open a FD for any tenure ranging from 6 months to 10 years. In fact, you can open multiple FDs of varying tenures
Steady Income Flow: You can choose to withdraw the interest income at monthly, quarterly, half-yearly or annual intervals.
Loan against Deposit: If you’re in need of funds, you can take a loan against your FD.
Reinvestment Option: Fixed deposit interest can be reinvested so that you reap the benefit of compounding.
Foreclosure: You can fully/partially withdraw after paying a penalty in the form of lower interest.
Another noteworthy aspect about Fixed Deposits is that they are covered by Deposit Insurance. Up to Rs.1 lakh of your deposit which includes principal plus interest enjoys DICGC cover.
Types of Fixed Deposits
You have the choice to invest in Bank Deposits or Company Deposits
Bank/NBFC fixed deposits are secured and offer you stable returns. When interest rates are high, then FDs can give excellent returns. However, after the recent demonetisation drive, return on FDs have fallen. FDs held with commercial and cooperative banks have also come under the purview of RBI.
Company Fixed Deposits are also referred to as Corporate Fixed Deposits. These are high interest earning, but they also have a high risk factor. Corporate fixed deposits are governed under Section 58A of the Companies Act and aren’t covered by Deposit Insurance. If you choose to invest in company deposits, verify the company’s track record and credit rating.
Return on Fixed Deposits
You earn good rate of interest on your Fixed Deposits. FD interest rates vary across banks and tenures. The interest rates on FD are affected by the following factors.
RBI Policies: The Cash Reserve Ratio and the Repo rate keeps on changing and is notified by RBI from time to time. Any change in these rates has a direct impact on the FD interest rate.
Current State of Economy: In a developing economy, the need for credit is higher. To meet the demand for credit, banks invite funds from depositors on which they offer higher interest rates. If demand for credit is low, FD interest rates decrease.
Inflation: Inflation leads to an erosion in the purchasing power of money. There is a devaluation. To compensate the interest loss on the loans lent by banks, it offers a higher rate on deposits.
Recession: There is economic slowdown and RBI infuses funds into the market. The interest rates on the cash reserve of banks are reduced. This has a cascading effect of a fall in FD interest rates.
How to Calculate Returns?
At the end of the tenure, you’re repaid the principal and interest. Using a Fixed Deposit Calculator, you can find out the interest earned as well as the FD maturity amount. This tool is available online and once you key in parameters such as deposit amount, rate of interest, tenure and compounding frequency, you will be able to know the quantum of return given by the fixed deposit investment.
Opening a Fixed Deposit account is quick and easy. Choose the bank which offers a high interest rate on Fixed deposit, choose the tenure you want, and submit your KYC. With technology making an impact on every front, you don’t have to take time out and visit a bank branch. You can apply for Fixed Deposit online from the comfort of your home or workplace.
Concussion: This tutorial described about What is a Fixed Deposit and What you Stand to Gain when investor deposit their money in FD scheme.