Interest rates and volatile stock markets, it is that time when banks and financial institutions are aggressively marketing the safe investment option: Fixed deposits. However, very often we see that various misconceptions about fixed deposits prevail among investors.
Here, making you aware about some of the most common myths and facts that you may face while investing in one.
Myth 1: Only banks offer fixed deposits.
Fact 1: companies offer fixed deposits too.
If we thought we could only approach bank to invest in a fixed deposit, well that is not the right idea. Various companies and financial institutions too offer fixed deposits for retail investors. Companies offering deposits are governed by proper guidelines under section 58A of the companies act. They generally offer a little higher interest rate than bank deposits. However, when compared to bank deposits, company fixed deposits are considered as an unsecured option. This is because bank deposits come with insurance for up to a maximum of Rs 1, 00,000 unlike company deposits.
Myth 2: More number of regular interest payments, more the returns.
Fact 2: A cumulative Fixed Deposit with returns only on maturity would fetch money more.
Fixed deposits come with two options: of receiving interest pay outs at regular intervals, or a cumulative deposit, where the whole amount (principal + interest) is received on the date of maturity. The annualised yield on the Fixed Deposit works out to be higher if we opt to receive the proceeds on maturity. This is due to the power of compounding.
In cumulative deposits, the interest is compounded at regular frequencies, instead of it being paid out. Higher the frequency of compounding more is the yield on investment.
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