What is Fixed Deposit?
A fixed deposit (FD) is a financial instrument provided by banks which provides investors with a higher rate of interest than a regular savings account, until the given maturity date. It may or may not require the creation of a separate account.
In a fixed deposit, interest is paid to you on maturity (end of the term period of the fixed deposit).The interest on the fixed deposit and the time period is fixed and this means you know the amount you will get on maturity of the fixed deposit, at the time of making the fixed deposit itself.
Types of FD:
➡ The regular fixed deposit
You deposit your money with a bank for a fixed time period called tenure of the fixed deposit. You get a higher interest on the money which you deposit in your fixed deposit than in a savings bank account. On maturity of your fixed deposit you are paid back your principal with interest.
You are not supposed to touch the money in the fixed deposit for the time you make the deposit. If you are in urgent need of money you can break your fixed deposit (Withdraw money from your fixed deposit).
You have a penalty of 0.5-1% lower interest on your fixed deposit than promised if you do so.
Let us understand how a regular fixed deposit calculates and pays you interest on the money you deposit with them.
➡ The flexi fixed deposit
In a flexi fixed deposit your fixed deposit is linked to a savings bank account. Your money moves between the fixed deposit and your savings bank account.
The flexi fixed deposit is also called the sweep in – sweep out fixed deposit.
➡ The 5 year tax saver fixed deposit
The 5 year tax saver fixed deposit is unique from other fixed deposits. You enjoy a deduction of INR 1.5 Lakhs a year under Section 80 C of the income tax act if you deposit your money in a 5 year tax saver fixed deposit.
Not all fixed deposits enjoy the Section 80 C benefits. You have to invest your money in a tax saver 5 year fixed deposit to avail this tax saving benefit.
This fixed deposit is non-callable (you cannot break the fixed deposit for 5 years).The interest paid to you on maturity of the fixed deposit is taxed as per the income tax slab you fall under.
Why should I invest in Fixed Deposit?
➡ Fixed rate of Interest:
Biggest benefit of FD is fixed rate of interest. The rate of interest remains same till maturity date of the FD, even if the market rates come down in future. This is a great feature for an investor who is looking for the certainty of income after a particular time. Whereas other instruments like shares and mutual funds offer a variable return.
Liquidity means ‘How fast an investment can be converted to cash ‘. FD is for a particular time period however, an investor can close it before maturity. So, in case investor gets some emergency and need money, one can withdraw money by closing FD, anytime. Some corporate FDs may have an initial lock period, till which investor can’t close the FD.
➡ Flexible duration:
Fixed deposit are available with multiple durations (From 7 days to 20 years), and investors can deposit money for the duration which matches his or her goal.
➡ Save Taxes:
One can also save taxes under section 80 C by investing in Tax saving FD. This FD is for a minimum period of 5 years and one can get maximum Rs.1.5 lacs deduction in one year.
➡ The safety of capital:
Fixed deposits are not risky as compared to the stocks or real estate. FD is considered safe investment for a conservative investor.
However, fixed return feature, which is biggest benefit if investing in FD can also be prime disadvantage of investing in FD. If the rate of interests rises in economy, you will not get increased rates. So it’s advisable to check your profile and needs before investing in FD.
Important factors affecting fixed deposits:
- Check the Fixed Deposit rates offered
Every bank offers fixed deposit service to its customers but the FD rates are different for various banks. There is a lot of competition among public and private banks due to which consumers may find different FD rates in India. Before making the investment, it is best to compare fixed deposit rates as that can help you to get a higher interest on your saving.
- Bank’s credit rating
Choosing a bank with a good credit rating can ensure that the investment you make is safe. Like various companies, the banks may also default and thus it is important to look for an institute with a good credit worthiness. There are special credit rating agencies that grade the bank Fixed deposit scheme. Comparing the grading along with the fixed deposit rates in India help ensure that your investment is safe.
- Liquidity of the fixed deposit
Fixed deposits are made with a fixed lock in period. The fixed deposit rates in India depend on the lock-in-period. In case of some types of fixed deposits, the investor cannot withdraw money from the account during a specific period of time, which is called as the lock-in-period. So apart from fixed deposit interest rates, it is important to compare lock in period too. You should also compare the maturity period of the fixed rate. If you withdraw money before maturity, banks generally charge a penalty. This also needs to be taken into consideration before making the investment.
- Payment schedule of FD interest
Different banks and institutes pay fixed deposit interest at a different period. Some pay the interest monthly or quarterly while there are other banks that prefer the quarterly, half yearly or annual payment schedule. Many of them also prefer to pay the interest amount cumulatively. For someone, who does not have a regular income, the periodic payment of FD interest is considered to be better. But if you want maximum returns on the investment then it is best to opt for cumulative interest as that is higher.
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