Fixed deposits (FDs) are widely used investment products, which allow you to save and also provide wealth-building opportunities. They are especially preferred by people who look for a stable return without taking on the risk of market fluctuations. Investors require a lump sum amount to start an FD. This article will help you understand what fixed deposits are, how they work, the benefits they provide, and a few other factors.
What is a Fixed deposit?
Let’s first understand what is FD. A fixed deposit is a type of investment where a lumpsum amount is deposited with a bank or financial institution for a determined term at a predetermined interest rate. Therefore, the invested amounts will be safe until the term comes to an end. The tenure may range from a minimum period of seven days to a maximum period being ten years. Once the term is complete, commonly known as the maturity period, the investor is paid the initial investment as well as the interest earned.
How Fixed Deposits Work?
When an individual opens a fixed deposit account, the person commits to deposit a specified amount for a specified period. The bank takes the deposited money for financing and also pays interest to the account holder. In general, the rate of interest on fixed deposit accounts may be higher than other savings accounts. Thus it can be a suitable investment option for those looking to realise optimum returns on idle funds.
The procedure for initiating a fixed deposit is simple and involves a few steps:
- Choose the Amount: Determine how much funds you want to invest.
- Decide the Term length: Choose how long you want to keep your funds locked in.
- Deposit the Amount: Place the desired amount in the fixed deposit account.
Once the FD matures, you can either withdraw the full amount or continue to re-invest it in another FD.
Advantages of Fixed Deposits
There are many advantages of investing in fixed deposits:
- Fixed Returns: FDs offer fixed returns on your investment, making them one of the safest investment options available.
- Low Risk: They are less risky compared to equities or mutual funds since they are not influenced by market volatility.
- Higher Interest Rates: Fixed deposits usually have higher interest rates compared to regular savings accounts.
- Flexible Tenures: You may choose various tenures depending on your investment goals and financial needs.
- Loan Against FD: Most of the banks permit investors to take loans against their fixed deposits without breaking them prematurely.
- Tax Benefits: Some of the fixed deposits also offer income-tax deductions as per the provisions of the Income Tax Act in India.
Difference Between Recurring Deposits and Fixed Deposits
Fixed deposits (FD) and recurring deposits (RD) are two of the most common savings options, but they cater to different saving habits and financial goals. Here is a table showing the difference between RD and FD:
| Recurring Deposit | Fixed Deposit |
| RD offers an option where you invest a fixed amount regularly, within a specified time frame ranging between 6 months and 10 years. | You make a one-time advance lump sum investment for a fixed tenure ranging between 7 days to 10 years. |
| Investment via Recurring Deposits instils savings discipline. | The interest rate is pre-determined, and the principal along with the interest is returned at maturity. |
| It may suit investors who are willing to invest small sums over a period of time as opposed to investing all at once.
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Fixed Deposit may suit people with a sizeable amount of funds to invest.
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While both give returns at nearly the same interest rate, the process is different. One asks to pay the sum in advance while the other requires payments at intervals.
Conclusion
Fixed deposits are a good investment option for people who plan to increase their savings safely and predictably. They provide fixed returns, have low risks, and offer other benefits that are crucial in personal financial planning. Knowing the differences between different kinds of savings instruments can even further strengthen your strategy. For instance, though both FDs and RDs promote savings, they are essentially different in the sense of depositing funds. FDs require a single large investment at the beginning, while RDs allow for a regular addition of smaller sums over time. Investors can choose the one that suits their financial needs.
