What is a fixed deposit

What is a fixed deposit

A fixed deposit or term deposit is one of the safest and most popular forms of investment in India. It has been traditionally seen as a safe and reliable way of investing money, with none of the volatility and risks associated with other investments like the stock market. It is simple to open a fixed deposit and requires minimal documentation.

A fixed deposit (FD) is a financial instrument that offers a higher rate of interest when compared to interest earned in a regular savings account. If you have some extra money and wish to invest it in a low-risk opportunity, a fixed deposit is a good option.

Here are some of the main features of a fixed deposit:

Period: A fixed deposit – as the name suggests – is for a fixed term, generally ranging from 15 days to 10 years. On maturity of your deposit, you are paid your original deposit amount plus the interest earned.

Amount: The amount to be invested can be deposited only once. If you want to invest any additional amounts, you will need a new FD account.

Maturity: On maturity, the amount is credited to the customer’s specified bank account.

Withdrawals: Sometimes, if you have an urgent need for the money, or if you spot a better investment opportunity, you might want to break your FD and withdraw the entire sum before the maturity date.  If you withdraw your FD before the maturity date, you will need to pay a penalty.

In other cases, you might only want to make a partial withdrawal – i.e. remove only a small amount of your total deposit. In such cases too, you will be charged a penalty and paid interest only on the remaining amount.

Renewals: On maturity, an FD can be renewed for a different tenure, or it can be auto-renewed in the absence of specific instructions.

Interest rate: The rate of interest varies from bank to bank according to the amount deposited, period of deposit and other such factors. The main purpose of this type of deposits is to enable individuals to earn extra interest for the surplus money they have.

In India, senior citizens enjoy a higher interest rate on their Fixed Deposits.

Tax: You can invest your money in tax-saving fixed deposit schemes. However, keep in mind that you will need to keep your FD for a minimum number of years if you choose to invest in such a scheme.

Advantages of fixed deposit:

a. Fixed deposits encourage individuals to save money over a longer period of time.

b. They enable the depositor to earn higher interest on their surplus money.

c. Allows them to plan their funds allocations as they are assured of a fixed amount of funds over a fixed period.

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