Fixed Deposits (FDs) are one of the most common investment options. Many people prefer FD because it offers steady growth over time. FDs allow individuals to save their earnings in a secure place. Unlike other investment options, they do not change with market movements. This makes it suitable for those who want stability. People can choose different periods based on their needs. Interest is added to the deposit at fixed intervals, making it easier to plan for future goals. Many banks and financial institutions provide FDs with various options. Understanding how FDs work helps in making an informed decision. This blog explains what is FD and how it works.
What is an FD?
A fixed deposit (FD) is an investment where a person deposits an amount for a set period. The institution pays interest at a fixed rate, which does not change until the term ends. The interest rate depends on the duration chosen. Once the FD reaches maturity, the depositor receives the initial amount along with the accumulated interest. FDs are available for different durations, ranging from a few days to several years. Some institutions allow early withdrawal, but this may lead to a lower repayment of interest.
Types of FDs
The following are the types of FDs:
- Regular FD: Regular FD offers a fixed deposit with a predetermined interest rate and maturity period.
- Tax-Saving FD: Tax-saving FDs have a lock-in period and offer tax benefits.
- Senior Citizen FD: These FDs are designed especially for senior citizens, offering a higher interest rate.
- Flexi FD: Flexi FD combines features of savings and fixed deposits, offering flexible withdrawals.
- Cumulative FD: In this FD, the interest is added to the principal and paid at maturity.
- Non-Cumulative FD: In non-cumulative FD, interest is paid out regularly, such as monthly or yearly.
- Corporate FD: It is offered by companies with varying interest rates and durations.
How Does FD Work?
The following points explain how FD works:
- Deposit Process: A person deposits an amount with a financial institution for a fixed period. Unlike RDs, which require monthly deposits, FDs involve a one-time deposit. Understanding the difference between FD and RD can help you choose one that suits your needs.
- Interest Rate Stability: The interest rate remains the same throughout the deposit term.
- Duration Options: The duration can range from a few days to several years.
- Interest Addition: Interest is added to the deposit at regular intervals.
- Maturity Returns: At the end of the term, the depositor receives the original amount along with the accumulated interest.
- Withdrawal Options: Some FDs allow premature withdrawal, but this may reduce the final payout.
- Renewal Features: FDs can be renewed or reinvested after maturity.
- Interest Rate Structure: Many institutions offer higher interest rates for longer durations.
Why is FD Considered a Safe Investment?
The reasons why FDs are considered a safe investment option are as follows:
- Safety of Principal: The capital you invest in a fixed deposit (FD) is securely protected and does not get affected by market fluctuations, unlike investments in stocks or mutual funds.
- Fixed Returns: FDs provide fixed returns, making it easy to plan for future goals
- Regulated by Authorities: In India, banks and financial institutions offering FDs are regulated by the Reserve Bank of India (RBI). It ensures your deposit is secure by following strict rules.
- Deposit Insurance: In the case of bank FDs, deposit insurance raises up to ₹5 lakh under Deposit Insurance and Credit Guarantee Corporation (DICGC). This will provide you with extra security during banking crises.
- No Market Risk: FDs tend to remain stable despite market fluctuations, providing fixed returns. However, inflation and bank default risk may affect overall gains.
- Flexible Tenure: You can choose an FD for a few months or for several years, depending on your needs. Flexibility in tenure allows better planning from your side.
- Liquidity Facility: Sometimes, you can request emergency withdrawals of FDs (with a slight penalty). For certain banks, you can deposit the FD as collateral against a loan to access funds without breaking the deposit.
- Higher Rates for Seniors: An additional reason why fixed deposits are preferred by retirees for consistent income is the higher interest rates that many banks offer to senior citizens.
Conclusion
A fixed deposit offers a simple way of investing. They provide a way to earn consistent interest and enable you to deposit savings. FDs are not directly affected by market fluctuations. However, inflation can potentially reduce real returns, and bank failures (though rare) may pose a risk. Almost all institutions offer different types of FDs depending on requirements. Interest earned can be withdrawn at regular intervals or reinvested for future use. While FDs offer many benefits, one should check the interest rates, terms, and withdrawal policies before depositing. Proper planning ensures the deposit meets financial targets. Most find stable savings with FDs, making it the most preferred investment vehicle.
