What is a fixed deposit? A lot of us come up with this question when we are looking at investment options. Fixed Deposits, commonly known as FDs, are investment options offered by banks, post offices, or even corporate companies. Fixed deposits, as the name indicates, are an investment of money for a definite period on which one earns returns. The interest earned is on the amount deposited over a fixed period. A fixed deposit is classified as a safe investment approach. Under a fixed deposit, one can garner higher and guaranteed returns with higher interest rates vis-a-vis a regular savings account. Fixed deposits offer an avenue for lower risk-averse investors to explore means to gain assured corpus.
The calculation of interest on FD relies on the principal amount invested and tenure of investment. Therefore, on maturity, one is entitled to receive both the principal amount and the interest compounded over the years. Notwithstanding, this is true only if you opt for a cumulative Fixed Deposit. Non-cumulative fixed deposits provide interest income on a monthly or quarterly basis.
Typically, investors favour investing in fixed deposits because it is straightforward and safe. The returns on fixed deposits are immune to changes in the rate of interest or market fluctuations. The payoff is assured with no apparent peril of forfeiture of the principal amount invested. The calculation of interest on FD can be chosen either periodically or on maturity. Nonetheless, withdrawal of the deposited amount before maturity will incur the premature withdrawal penalty.
Fixed Deposit: Features
- Safe Investment
Contrary to most market-dependent investments, fixed deposits are less prone to changes over time. They are more reliable and secure. Moreover, they are unaffected by market volatility and remain static for the whole period of investment. The return generated by the FDs is fixed.
- Interest Rate
The calculation of interest on FD depends on the tenure of investment. It also relies on various macroeconomic aspects such as the policies implemented by the RBI to counter inflation. Customarily, a higher interest rate is earned on long-term FDs in comparison to short-term FDs.
- Tenure Flexibility and Renewal
The flexibility of choosing a tenure depends upon the investor. The period of an FD varies from a week to ten years. The choice of the period is set at the time of opening an FD. Consequent to the choice of tenure, the interest rates of fixed deposits vary accordingly. Renewal of the FD can be done conveniently on maturity keeping in mind the interest rate at the given time.
- Easy Planning
Before investing in a fixed deposit, it is recommended to use the fixed deposit calculator. The interest rate calculator is readily accessible online and helps in the easy planning of the investment. On providing the amount to be invested and the period of investment, the calculator finds out the following values:
- Maturity amount
- Interest Earned
- Payout Value
- Tax Deduction
The interest earned on the principal amount is subjected to taxation. One can calculate income under FD interest in the ‘other income sources’ segment while filing returns.
Fixed Deposit: Benefits
- Fixed Deposits are safe investment options that give fixed returns.
- There is no peril to the principal invested amount.
- The option to get the earned interest is either periodically, i.e., monthly or quarterly or receive an aggregate amount on maturity.
- Fixed deposit returns are immune to market fluctuations.
- Usually, senior citizens earn a higher interest rate on fixed deposits.
Varying Interest Rates of FDs
As what is a fixed deposit is lucid, let us look at the varying interest rates. The interest rates are not the same across all financial institutions. They vary depending on some of the factors that are enumerated:
- Financier Type
Large financial entities in the economy generally do not face difficulty in attracting investors. However, smaller banks may offer higher interest rates initially to lure depositors.
- Profitability of the financier
The repo rate of RBI directly influences the FD rates. However, with an increase in repo rate, large financial entities with greater profitability usually increase the FD rates marginally.
Keeping in mind all the above points, it is right to say that a fixed deposit is an excellent investment option. It provides guaranteed returns without putting your money at risk. Now that what is a fixed deposit is clear, you can apply for one as and when required.