What is Fixed Deposit?

Fixed Deposit (FD) is an investment instrument offered by institutions to their members. Through FD members invest a fixed amount at a fixed rate of interest for a fixed period of time. The interest rate varies with different financial institutions, but it is usually higher than the interest earned on savings accounts.

Fixed deposits are available for different tenures, such as short term of 7-14 days to long term of up to 10 years. Fixed deposits are also sometimes called term deposits.

How does Fixed Deposit work?

You can think of a fixed deposit as lending money to an institution. When you invest in an FD, the financial institution guarantees to return the invested amount after a fixed period of time (maturity period) and pays you interest for it. The organization lends this money to other borrowers and charges interest on it, a portion of which is paid back to us in the form of interest.

The interest earned on FD depends on the tenure of the FD. For example, a 7-day FD will have a lower annual interest rate, while a one-year FD will fetch a higher interest rate. This is because of the time-risk of money, i.e. a rupee today is worth more than a rupee in the future, as inflation causes prices to rise over time. The investor should be compensated for this.

You can choose to reinvest the interest earned or get it regularly in your institution account.

In Cumulative FD you get interest and principal amount after maturity. Interest is reinvested annually in this option. So you will not get regular interest, but a lump sum at the end of the FD tenure. If you don’t need regular income, then Cumulative FD can be a good option. In this we also get the benefit of compound interest.

In non-cumulative FD, interest is paid at regular intervals. You get the option to earn interest at monthly, quarterly, half-yearly or yearly intervals. This gives us regular income, but it loses the opportunity to earn interest on interest.

Advantages of FD:

Fixed returns: While market related instruments may incur losses due to market volatility, FDs offer fixed returns on investment. FD keeps your principal safe and gives higher returns than savings accounts.

Compounding: FDs can earn interest on interest, allowing the investment to grow faster.

Small investment amount: If you want to start investing habit, but don’t have a lot of money, then FD is the best option, as one can start investing from ₹500.

Liquidity: FDs have the facility of early disbursal, but you may lose interest for a period of time. Still, this is the advantage of liquidity that one can break FD in case of emergency to fulfill one’s need.

Easy Process: FD investment process is very easy, it can be easily done online and offline, through net banking or mobile banking.

Higher rates for senior citizens: Senior citizens get a higher interest rate on their FDs, which enables them to earn more income after retirement.